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Parker-Hannifin Benefits From Acquisitions Despite Cost Woes

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We have issued an updated research report on Parker-Hannifin Corporation (PH - Free Report) on Apr 17.

The company is one of the leading manufacturers of motion & control technologies and systems. Parker-Hannifin’s products and solutions are mainly used in industrial, mobile and aerospace markets. It currently has a $16.8-billion market capitalization.

Factors Favoring Parker-Hannifin

Acquired Assets: The company has been investing in acquisitions over time. It acquired CLARCOR in March 2017, Exotic Metals Forming Company in September 2019 and LORD Corporation in October 2019. Notably, acquired assets had a positive impact of 38.9% on Parker-Hannifin’s Aerospace Systems segment in second-quarter fiscal 2020 (ended December 2019).

For fiscal 2020 (ending June 2020), the company believes that acquired assets will boost sales by 6.9%. In particular, LORD and Exotic buyouts are anticipated to yield synergies of $18 million in the year.

Rewards to Shareholders: Parker-Hannifin believes in rewarding shareholders handsomely through dividend payouts. In the first half of fiscal 2020 (ended December 2019), the company distributed dividends of $227 million, reflecting growth of 13.3% from the year-ago period.

It is worth mentioning here that the company announced a hike of 16% or 12 cents per share in its quarterly dividend rate to 88 cents in April 2019. We believe that healthy cash flow will support it to return more value to shareholders in the quarters ahead.

Between fiscal 2019 and 2023, the company anticipates distributing $16.5 billion as dividends.

Long-Term Tailwinds: Its unique Win Strategy, streamlined organization structure and growth investments will likely benefit Parker-Hannifin in the years ahead.

The company expects its revenues to expand 150 basis points (bps) greater than Global Industrial Production Index (GIPI) by fiscal 2023 (ending June 2023). Its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin are estimated to be 21% and free cash flow is expected to be $2.3 billion. Adjusted earnings per share are anticipated to be $16.90.

Factors Working Against Parker-Hannifin

Realignment Expenses: The company’s realignment expenses adversely impacted its earnings per share by 4 cents per share and 8 cents in the first quarter (ended September 2019) and the second quarter of fiscal 2020, respectively.

The company anticipates business realignment expenses of $40 million for fiscal 2020.

High Debts & Forex Woes: High debts increase financial obligations and, in turn, hurt profitability. Parker-Hannifin’s long-term debts increased 19.1% (CAGR) in the last five fiscal years (2015-2019). Exiting second-quarter fiscal 2020, the metric stood at $8,141.2 million, suggesting an 89.2% increase from the previous quarter’s reported figure. Interest expenses, net, in the quarter were $82.9 million.

Additionally, its international presence has exposed it to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Forex woes had adverse impacts of 0.4% in the second quarter of fiscal 2020.

For fiscal 2020, the company expects forex woes to hurt its sales by 0.5%.

Share Price Performance and Earnings Estimate Revision: Market sentiments have been against Parker-Hannifin for quite some time now. Its stock price has decreased 39.2% in the past three months compared with the industry’s decline of 26.5%.




Furthermore, the company’s earnings estimates have been lowered in the past 60 days. Currently, the Zacks Consensus Estimate for its earnings is pegged at $9.01 for fiscal 2020 and $9.17 for fiscal 2021 (ending June 2021), reflecting declines of 15.1% and 21.9% from the respective 60-day-ago numbers.

Parker-Hannifin Corporation Price and Consensus

 

Parker-Hannifin Corporation Price and Consensus

Parker-Hannifin Corporation price-consensus-chart | Parker-Hannifin Corporation Quote

Also, estimates for the third quarter of 2020 (ended March 2020, results are awaited) have been lowered by 7.8% to $2.26 in the past 60 days. The company currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company (TNC - Free Report) , Broadwind Energy, Inc. (BWEN - Free Report) and CECO Environmental Corp. . While Tennant currently sports a Zacks Rank #1 (Strong Buy), both Broadwind Energy and CECO Environmental carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 30 days, earnings estimates for the companies have been unchanged for the current year. Further, positive earnings surprise for the last four quarters, on average, was 26.60% for Tennant, 10.42% for Broadwind Energy and 26.98% for CECO Environmental.

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