Parker Hannifin Tops Estimates

Parker Hannifin Corp. (PH - Analyst Report) reported earnings per share from continuing operations of 94 cents for the third quarter of 2010, exceeding the Zacks Consensus Estimate of 76 cents. Fiscal 2010 third quarter revenues were $2.6 billion, an increase of 11.0% compared with the second quarter of fiscal 2010 and an increase of 11.5% from $2.3 billion in the third quarter a year ago. 

Segment Details 

In the Industrial North America segment, third quarter sales increased 11.9% to $958.6 million, and operating income increased 82.8% to $133.6 million, compared to the year-ago period. 

In the Industrial International segment, third quarter sales increased 18.9% to $995.2 million, and operating income increased 185.6% to $109.3 million, compared to the corresponding quarter of prior year. 

In the Aerospace segment, third quarter sales declined 6.4% to $449.2 million, and operating income declined 24.2% to $49.8 million, compared to that in 3Q09. Aerospace results were primarily impacted by lower commercial MRO sales and continued weakness in the business and regional aircraft markets. 

In the Climate & Industrial Controls segment, third quarter sales increased 23.9% to $211.8 million, and operating income increased 321.2% to $16.3 million, compared to the similar period in 2009. 

Order Intake 

The company reported an increase of 23% in total value of orders for the quarter ending Mar 31, 2010, compared with the same quarter a year ago. Orders increased 30% in the Industrial North America segment, compared to the same quarter in the year-ago period. Industrial International segment orders increased 42%. Orders declined 22% in the Aerospace segment on a 12-month moving average basis, while it increased by 38% in the Climate and Industrial Controls segment, compared to the year-ago period. 

Guidance 

For 2010, the company increased its previously issued guidance for earnings from continuing operations to the range of $2.95 to $3.15 per diluted share. 

We believe Parker-Hannifin is a high-quality company and is showing good execution through its cost saving efforts. Although Parker-Hannifin stands to benefit from any recovery in global manufacturing activity, the company’s increased scale in its international business (where Europe represents by far the largest geography) as well as its meaningful aerospace presence increases its late-cycle exposure relative to past economic cycles. 

We expect MRO (Maintenance, Repair, and Overhaul) to get a boost from continued deferral of capital investment in new machines. Parker-Hannifin’s strong exposure to MRO-type products and ability to convert net income into free cash flow will benefit future earnings. 

Although Parker-Hannifin operates in fragmented and cyclical markets, its strong distribution system provides an edge over competitors. We believe this distribution system is likely to result in asset turnover and returns on invested capital above those of peers, despite the impact of the weak economy. In addition, to stay ahead of competitors, the company emphasizes product innovation and technological improvement. 

Parker-Hannifin is a leading worldwide full-line diversified manufacturer of motion and control technologies and systems, including fluid power systems, electromechanical controls and related components. In addition to motion and control products, the company also is a leading worldwide producer of fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems. 

We currently have an Outperform recommendation on Parker-Hannifin.

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