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Is Parker-Hannifin (PH) Likely to Disappoint in Q4 Earnings?

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Parker-Hannifin Corporation (PH - Free Report) is scheduled to report fourth-quarter fiscal 2018 results on Aug 2, before the market opens.

The company has an excellent earnings surprise history, delivering an average positive surprise of 7.05% in the trailing four quarters. Notably, the company recorded its 11th consecutive earnings beat in the last reported quarter, surpassing estimates by 6.87%.

Let’s see how things are shaping up for this announcement.

Factors at Play

Over the past few quarters, Parker-Hannifin has been affected by an inflation in prices for core materials like steel, aluminum, castings and nickel, among others. This can significantly weigh on the company’s profits and margins in the quarters ahead. Also, of late, the company has been witnessing substantial rise in the prices of steel and aluminium and the trend is expected to continue, going forward.

Moreover, the company has been experiencing sluggishness in its key natural resources markets, which include oil and gas, agriculture, mining and construction equipment. This weakness exerts a lot of pressure on the company’s distributors engaged in the oil and gas business. The company projects more softness in emerging markets and its distribution channel in the quarters ahead.

Although, the company’s ongoing realignment plan might prove beneficial in the long run, it is likely to drag on its near-term financials. In fact, Parker-Hannifin expects to incur business realignment expenses of about $50 million and CLARCOR synergy costs of $58 million in fiscal 2018. At the same time, there is a potential risk that restructuring activities undertaken may not be completed within the stipulated time and expected cost savings from such activities may not be realized. We believe, high costs and expenses can hurt the company's margins in the quarters ahead.

However, the Zacks Consensus Estimate for revenues from the Diversified Industrial North America segment in the to-be-reported quarter is pegged at $1,795 million, reflecting  growth of 7.8% year over year. Revenues from Industrial International segment are also projected to be strong with the estimates pegged at $1,403 million, up 14.3% from reported revenues of $1,228 million in the year-ago quarter.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Parker-Hannifin in the to-be-reported quarter. This 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. But that is not the case here as you will see below.

Earnings ESP: Parker-Hannifinhas an Earnings ESP of -0.31% as the Most Accurate Estimate is pegged at $2.90, lower than the Zacks Consensus Estimate of $2.91. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Parker-Hannifincarries a Zacks Rank #4 (Sell).

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.

Key Picks

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

Actuant Corporation (ATU - Free Report) has an Earnings ESP of +4.72% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Welbilt, Inc. (WBT - Free Report) has an Earnings ESP of +0.54% and a Zacks Rank of 2.

EnPro Industries (NPO - Free Report) has an Earnings ESP of +7.80% and a Zacks Rank #3.

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