Parker-Hannifin (PH) Q4 Earnings, Sales Top On Win Strategy

Parker-Hannifin Corporation (NYSE:PH) reported better-than-expected results for fourth-quarter fiscal 2016. Adjusted earnings of $1.90 per share surpassed the Zacks Consensus Estimate of $1.77 and rose 32.9% on a year-over-year basis.

The year-over-year improvement in the bottom line came largely on the back of the new Win Strategy. Also, a fall in cost of sales proved conducive to the earnings performance.

For full-year 2016, the company reported adjusted earnings per share of $6.46, down 10.9% from the year-ago tally. Dismal top-line performance impacted the earnings performance to a certain extent.

Inside the Headlines

Net sales in the second quarter fell 6% year over year to $2,957.1 million but surpassed the Zacks Consensus Estimate of $2,937 million. Lackluster performance in the company’s Diversified Industrial segment proved to be a major drag.

For full-year 2016, the company’s net sales of $11,360.7 million fell 10.6% on a year-over-year basis. Tough macroeconomic conditions, order declines and currency fluctuations weighed on the full-year revenue performance.

Parker-Hannifin’s adjusted total segment operating income for the quarter stood at $437.3 million, relatively flat on a year-over-year basis.

Segmental Performance

At the Diversified Industrial Segment, North American sales for the fiscal fourth quarter decreased 10.8% to $1,260.2 million. Also, this segment recorded a 10% decline in orders on a year-over-year basis.

International Industrial, which is also classified under the Diversified Industrial segment, reported a 4.2% decrease in sales to $1,094.6 million. Despite tepid sales, orders at this segment rose 3% on a year-over-year basis.

Revenues at the Aerospace Systems segment grew 2.4% year over year to $602.4 million. Also, orders at this segment improved an impressive 14% in the quarter under review.

Liquidity

As of Jun 30, 2016, Parker-Hannifin’s cash and cash equivalents were $1,221.6 million compared with $1,180.6 million at the end of fourth-quarter fiscal 2015. Long-term debt was $2,675 million at the end of fourth-quarter fiscal 2016 compared with $2,724 million as of Jun 30, 2015.

Share Repurchase

During the fourth-quarter of fiscal 2016, Parker-Hannifin repurchased approximately $108 million of shares, bringing the total repurchase amount for fiscal 2016 to approximately $558 million.

Guidance

Concurrent with the earnings release, Parker-Hannifin released its guidance for the fiscal year ending Jun 30, 2017. The company expects adjusted earnings from continuing operations in the range of $6.40 to $7.10 per share. This guidance includes expected business realignment expenses of approximately 25 cents per share.

Parker-Hannifin believes that majority of its key markets we are witnessing a decelerating rate of decline. Though the company is experiencing stable conditions in its end markets, it has offered a conservative guidance on account of the overall sluggishness in macroeconomic conditions. It believes simplification, business restructuring actions and the reformed Win Strategy will lead to considerable improvement in margins. However, tough economic conditions are expected to result in flat year-over-year sales.

Our Take

Prolonged sluggishness in the 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 over the past few quarters, adding to Parker-Hannifin’s woes. Also, strengthening of the U.S. dollar and escalating restructuring charges are expected to hurt the company’s financials in the near term.

Despite these negatives, we believe that the company’s Win Strategy will help combat some of the weakness and drive performance. This apart, the company’s extensive distribution network, which serves the lucrative maintenance, repair and operation (MRO) markets and the thriving aerospace business, is expected to boost aftermarket parts sales.

Parker-Hannifin currently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the same industry include Gorman-Rupp Co. (NYSE:GRC) , Tennant Company (NYSE:TNC) and Illinois Tool Works Inc. (NYSE:ITW) . While Gorman-Rupp and Tennant sport a Zacks Rank #1 (Strong Buy), Illinois Tool Works holds a Zacks Rank #2 (Buy).