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On Jan 3, we upgraded our recommendation on Parker-Hannifin Corporation (PH - Analyst Report) to Neutral from Underperform based on its improved growth prospects.

Why the Upgrade?

On Oct 18, Parker-Hannifin reported modest first quarter 2014 results with net income of $244.3 million or $1.61 per share compared with $239.9 million or $1.57 per share in the year-earlier quarter. The year-over-year growth was driven by incremental orders in the quarter and lower share count. The reported earnings were also 9.5% above the Zacks Consensus Estimate of $1.47.

Following the release of first-quarter results, the Zacks Consensus Estimate for fiscal 2014 has increased 0.6% to $6.55 per share.

On Dec 10, the company reached a new 52-week high driven by strong balance sheet; accretive acquisitions and its ability to consistently raise dividends. Further, the order trends for the company are also improving. In addition, Parker-Hannifin’s consistently strong performance in its Aerospace segment is giving it a solid momentum in the industry with improvement in orders.

Parker-Hannifin has been assiduously expanding its market share, especially in emerging economies like China, and boosting business portfolio over time through its acquisition strategy. The company acquired eight companies in fiscal 2013, which contributed $0.5 billion in annual sales. During the first quarter of fiscal 2014, acquisitions accounted for more than 2% increase in revenues.

Moreover, Parker-Hannifin has a strong balance sheet and generates a strong cash flow. Over the past decade, Parker Hannifin has increased its operating cash flow from just $0.5 billion in 2001 to $1.8 billion in 2013. The company also offers healthy dividend hikes, reflecting its commitment of rewarding shareholders with risk-adjusted returns. For fiscal 2013, the company has consecutively raised its dividend four times by 5%, reflecting a yield of 1.5%.

Further, following the first quarter earnings release, the company increased its fiscal 2014 guidance. Earnings from continuing operations for the fiscal are currently expected to be in the range of $7.78 to $8.38, up from its earlier guidance of $7.35 to $8.15 per share.

Other Stocks to Consider

Parker-Hannifin currently has a Zacks Rank #3 (Hold). Other stocks worth considering include Middleby Corp. (MIDD - Analyst Report) with a Zacks Rank #1 (Strong Buy), and Altra Industrial Motion Corp. (AIMC - Snapshot Report) and Barnes Group Inc. (B - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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