Two Wall Street analysts took a favorable view this week of Parker-Hannifin Corp (NYSE: PH)'s updated five-year outlook.
KeyBanc Capital Markets' Jeffrey Hammond maintains an Overweight rating on Parker-Hannifin stock with an unchanged $225 price target.
Baird Equity Research's Mircea (Mig) Dobre upgraded Parker's stock rating from Neutral to Outperform with an unchanged $203 price target.
KeyBanc: Compelling Story
Parker management presented a "compelling long-term story," including a five-year outlook, Hammond said in a research report. The company's five-year targets include the following, the analyst said:
- 3.2-percent organic growth.
- An increase in segment operating margins from 17 percent to 19 percent.
- A doubling of free cash flow to $2.2 billion.
The metrics don't include any further improvements from M&A or stock repurchases, Hammond said. Parker is likely to be "more proactive" in stock buybacks, with less interest in sub-$50 million tuck-ins, he said.
Recent headline concerns surrounding the Clarcor integration disruption have been a major driver of near-term weakness, but the deal has so far exceeded expectations "almost across the board," the analyst said. Parker boosted its cost synergies outlook from $140 million to $160 million and introduced a new revenue synergy outlook of $100 million.
The motion control company appears to be undervalued versus its peers, as it is in the early stages of momentum from the Clarcor integration and boasts several notable runways related to management's internal initiatives, Hammond said.
Baird: Buy The Dip
Parker provided a "credible path" to achieve EPS of $15 or more by fiscal 2023, Dobre said in a research report. Several pieces of the company's guidance appear beatable, including revenue, which is "appropriately conservative" and implies a compounded annual growth rate of 2.5 percent, Dobre said. A 3.2-percent growth rate "does not seem like a stretch," she said.
Parker implied incremental margins of more than 35 percent are "robust" and could come from a combination of CLARCOR synergies, ongoing productivity and lower restructuring, the Baird analyst said.
Dobre's main takeaway from Parker's presentation is that management is signaling that performance continues to improve, and the company has multiple initiatives in the pipeline. The Ohio-based company wants to lower the total number of business units from 122 in fiscal 2015 to 88 and reduce its revenue complexity, Dobre said.
Parker's capital deployment plans could act as a "buffer" against any top-line volatility, as a share buyback and other programs could add as much as $2 to $3 to EPS, depending on the manner and timing, the analyst said.
Parker shares were trading higher by 2.5 percent at $180.79 near the end of Thursday's trading session.
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