Parker-Hannifin Corporation: Focus on Margin Compression Unnecessary, ROIC Expansion is Key

Parker-Hannifin Corporation (PH), the $13.8b market cap industrial machinery company based out of Cleveland, Ohio with roughly 40-45% of internationally-derived revenues, reported financial results for its quarter ended December 31 that were impressive by any measure -- except those used by many sell side analysts. Its $2.867b in revenue that beat consensus of $2.747b and the highest Street estimate of $2.828b, but EBIT of $325m fell short of consensus of $342m and the lowest Street estimate of $329m. This miss on margins was enough to send the stock down more than 6% in a single day. The market seems to be focusing on margin compression instead of ROIC expansion. Here are the key highlights from the December 2010 quarter that matter in our opinion:

  • Trailing 12-month ROIC came in at 16% for the quarter, a significant rise above the 13.1% experienced in the prior quarter and the 4.9% experienced in the year ago period.
  • Trailing 12-month economic profit was $481m by our measure, well above the $334m in the prior quarter and economic loss of $392m last year.
  • Trailing 12-month free cash flow was $1.011b by our measure, about $100m less than the prior and year ago quarters, but including higher estimated cash taxes paid, higher capital spending and an increase in working capital investment.
  • Total debt decreased to $1.843b from $2.137b in the prior quarter.
  • ROIC and cash flow are in our opinion likely to show continued, steady improvement in the quarters ahead.
  • PH stated that demand remained strong across many markets, order rates increased in all segments, and its aerospace segment saw demand levels recover.
  • "Based on the way these orders are coming through, I think this [rebound] is going to be sustainable," CEO Don Washkewicz told the Wall Street Journal following the report.

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Disclosure: I am long PH.