Is Parker-Hannifin A Buy After Earnings?

Parker-Hannifin Corporation (NYSE:PH) dropped about 7% after its report for the third quarter of 2012 came in below analyst expectations. The company manufactures industrial equipment such as fluid power systems. According to its report, earnings were down 19% in the first fiscal quarter (which ended in September) compared to the first quarter of its last fiscal year. The $1.57 per share in earnings, as mentioned, also missed analyst consensus of $1.73. Revenue was slightly down from a year ago as well.

More worryingly, Parker-Hannifin Corporation slashed its estimates for the fiscal year: its guidance, previously centered at $7.50 per share in earnings, was cut to a range centered on $6.45 per share. It is currently trading a bit below $79, a price which would imply a current-year P/E of 12. Present analyst estimates for the fiscal year after that (ending in June 2014) equate to a forward P/E of 10; after the sell-side reduces their earnings targets for that year in reaction to the company’s news, that figure will likely move towards 12 as well. The company’s market capitalization has slipped below $12 billion as a result of its decline, and is currently at $11.8 billion.

AQR CAPITAL MANAGEMENT

Parker-Hannifin Corporation was one of Impala Asset Management’s top five holdings at the end of June according to the fund’s 13F filing. Impala, managed by Tiger Cub Robert Bishop, increased its position from a very small level at the beginning of the quarter to 1.4 million shares (see more stock picks from Impala Asset Management). Cliff Asness’s AQR Capital Management also bought shares during the second quarter, increasing its stake by 13% to a total of about 300,000 shares (find more stocks that Cliff Asness and his team liked). The largest position tracked in our database of 13F filings belonged to Diamond Hill Capital, which is managed by Ric Dillon; Diamond Hill reported a position of 1.8 million shares, which at that time was worth about $136 million (research other stocks that Diamond Hill had over $100 million invested in).

We would compare Parker-Hannifin to diversified industrial equipment company Emerson Electric Co. (NYSE:EMR), electrical and hydraulics components provider Eaton Corporation (NYSE:ETN), flow control products manufacturer Watts Water Technologies Inc (NYSE:WTS), and to large industrial goods company Honeywell International Inc. (NYSE:HON). All four of these peers experienced double-digit percentage increases in earnings in their most recent quarter, though in each case the most recent quarterly report comes from June. Eaton is the best value from a quantitative perspective: it trades at trailing and forward P/Es of 11 and 10, respectively. It also pays an impressive 3.3% dividend yield to shareholders, and assuming that it does not encounter similar issues as Parker-Hannifin it could be an appealing stock. Emerson also pays a solid dividend yield, at 3.2%, though it trades at a premium to the levels where Parker-Hannifin now finds itself. Emerson’s forward P/E is 13, and we’ll have to see if it saw a sharp decline in the third quarter as well.

Watts and Honeywell are more modest on the dividend front. Watts also carries the highest forward P/E of this peer group at 14, and its market capitalization of $1.3 billion is on the smaller side as well. Barring anything particularly attractive about its product line, we would avoid the stock. Honeywell, meanwhile has a large market cap of nearly $50 billion. It trades at 22 times trailing earnings, but only 13 times forward earnings estimates as Wall Street analysts expect considerably better numbers next year. Even with decent revenue and earnings growth recently, we are skeptical.

Parker-Hannifin’s quarterly report is a poor sign for the company’s future prospects. Even after the stock’s decline, it does not seem to be a good buy relative to its peers unless those companies start reporting poor results as well.

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