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Parker-Hannifin (PH) to Gain From Healthy Demand Amid Cost Woes

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We have issued an updated research report on Parker-Hannifin Corporation PH on May 13.

The Cleveland, OH-based company manufactures and provides various motion & control technologies and systems. Notably, its precision-engineered solutions are used widely in mobile, industrial and aerospace markets. The company belongs to the Zacks Manufacturing - General Industrial industry, which, in turn, comes under the ambit of the Zacks Industrial Products sector.

There are a number of factors that are influencing Parker-Hannifin’s prospects. A brief discussion on important factors is discussed below:

Financial Performance and Projections: The company delivered better-than-expected results for the third quarter of fiscal 2021 (ended Mar 31, 2021). Its earnings and sales surpassed the Zacks Consensus Estimate by 9.60% and 1%, respectively. The bottom-line results benefited from improvements in sales and margins.

Improving demand, cost actions and Win Strategy are likely to be advantageous for the company in the quarters ahead. Parker-Hannifin increased its projections for fiscal 2021 (ending June 2021), now anticipating year-over-year revenue growth of 4-5% and adjusted earnings of $14.65-$14.95 per share. The projections compare favorably with the previously mentioned sales growth of 0.7-2.7% and adjusted earnings of $13.65-$14.15.

Cost Actions and Margins: The company’s discretionary and permanent cost actions have been yielding benefits for the past few quarters. Notably, its discretionary cost actions include measures like lowering capital expenditure and discretionary expenses. In the first nine months of fiscal 2021 (ended Mar 31, 2021), the company’s discretionary actions yielded benefits of $215 million. Then again, the company’s permanent cost actions yielded gains of $190 million. For fiscal 2021, it anticipates savings from discretionary and permanent cost actions to total $225 million and $250 million, respectively.

Improved sales and benefits from cost actions are likely to be advantageous for Parker-Hannifin in the quarters ahead. For fiscal 2021, the company expects adjusted segment operating margin of 20.7-20.9%, up from the previously mentioned 20.2-20.6%.

Capital Allocation: The company effectively uses its capital for acquisitions, rewarding shareholders and boosting organic prospects. Notably, it acquired Exotic Metals Forming Company and LORD Corporation in fiscal 2020 (ended Jun 2020). Parker-Hannifin noted that acquired assets had a positive impact of $394 million on sales in the first three quarters of fiscal 2021.

As regard to rewards to shareholders, the company paid out dividends of $341.3 million in the first three quarters of fiscal 2021. Also, after a halt due to the pandemic, the company reinstated its share buyback activities. It brought back shares worth $50 million in third-quarter fiscal 2021.

Aerospace Systems: The segment accounted for 16% of Parker-Hannifin’s sales in the third quarter of fiscal 2021. Its sales were down 19.6% from the year-ago quarter as orders declined 19%.

For fiscal 2021, the company expects persistent weakness in Aerospace Systems, with a year-over-over sales decline of 12.5-13.5%.

Realignment Expenses and Other Cost Woes: Despite long-term benefits, the company’s realignment initiatives are affecting near-term performances. For fiscal 2021, Parker-Hannifin expects earnings headwinds of 38 cents per share from realignment expenses.

In addition to realignment expenses, the company’s corporate G&A, interest and other expenses are expected to total $479 million in fiscal 2021. It is worth mentioning here that other expenses lowered earnings by 4 cents per share in third-quarter fiscal 2021.

International Operations & Peers: Parker-Hannifin carries out its operations in multiple countries, including the United States, China, Brazil and South Korea. International diversification has exposed it to unfavorable movements in foreign currencies, geopolitical issues, local competitive pressure and macroeconomic challenges.

Also, Parker-Hannifin competes with companies with the same line of businesses or product manufacturing. Three such companies are Danaher Corporation DHR, Donaldson Company, Inc. DCI and Eaton Corporation plc ETN. Earnings surprise for the last reported quarter was 50.90% for Danaher, 1.96% for Donaldson and 15.20% for Eaton.

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ParkerHannifin Corporation (PH) : Free Stock Analysis Report
 
Eaton Corporation, PLC (ETN) : Free Stock Analysis Report
 
Danaher Corporation (DHR) : Free Stock Analysis Report
 
Donaldson Company, Inc. (DCI) : Free Stock Analysis Report
 
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