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Parker-Hannifin (PH) Q4 Earnings: Disappointment in Store?

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Leading manufacturer of motion & control technologies and systems, Parker-Hannifin Corporation (PH - Free Report) , is slated to report fourth-quarter fiscal 2016 results on Aug 4, before the opening bell.

Last quarter, the company scored a hat-trick of earnings beats, with an average positive surprise of 3.4%. Meanwhile, the average positive surprise for the trailing four quarters stands at approximately 3.6%.

We expect the company to continue its strong performance in the to-be-reported quarter as well.

Factors Influencing the Past Quarter

Prolonged sluggishness in natural resources market that includes oil and gas, agriculture, mining and construction equipment are proving to be a major concern for the company. Softness in key end-markets has adversely affected order levels (down 6%) during the third quarter of fiscal 2016. We expect such softness in emerging markets and distribution channel to dampen results in the soon-to-be-reported quarter.

In addition, the company’s top line has been hurt by the strengthening of the U.S. dollar, which impacted sales by 10.6%. Parker-Hannifin had previously expected revenues to be impacted to the tune of 3% by currency headwinds. This apart, increase in prices for core materials like steel, aluminium, castings and nickel, among others, can pose as major headwinds.

Also, the company witnessed an over 200% year-over-year increase in its restructuring expenses.  Meanwhile, for fiscal 2016, Parker-Hannifin has decided to raise its expected business realignment costs from $100 million to $120 million. We believe that though the diligent restructuring efforts hold potential over the long haul, escalating charges may weigh on the financials in fourth-quarter 2016.

Despite, these negatives, Parker-Hannifin’s fourth-quarter fiscal 2016 earnings are expected to benefit from its “Win Strategy," which forms the core of its business system. The company had upgraded its Win Strategy in first-quarter 2016 to focus on factors like customer experience, growth areas and financial performance. The company believes that this strategy will help it to deliver a compound annual growth rate in earnings of 8% over the next five years.

This apart, the company’s extensive distribution network, which sells to the more lucrative maintenance, repair and operations (MRO) markets, are expected to propel aftermarket parts sales in the fiscal fourth quarter. In addition, solid international presence and a thriving aerospace business are expected to be profit churners in the quarter.

PARKER HANNIFIN Price and EPS Surprise

PARKER HANNIFIN Price and EPS Surprise | PARKER HANNIFIN Quote

Earnings Whispers

Our proven model does not conclusively show that Parker-Hannifin is likely to beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company stands at -3.39%. This is because the Most Accurate estimate of $1.71 is below the Zacks Consensus Estimate of $1.77.

Zacks Rank: Parker-Hannifin’s Zacks Rank #4. Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Harsco Corp. has an Earnings ESP of +38.46% and a Zacks Rank #1. The company is scheduled to report results on Aug 4.

Impax Laboratories has an Earnings ESP of +3.03% and a Zacks Rank #2. The company is slated to report results on Aug 9.

Exelixis, Inc. (EXEL - Free Report) has an Earnings ESP of +3.70% and a Zacks Rank #3. The company is likely to report results on Aug 3.

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