EUR 850.00 For Business Accounts Only

Morningstar | Solid Performance From Parker as It Closes Out Its Fiscal Year 2018

Narrow-moat rated Parker Hannifin had a solid fiscal fourth quarter, with broad-based organic growth across all segments. That said, nothing about its latest results alters our fundamental long-term view of the firm. However, we plan to increase our fair value estimate to about $165 per share from $162 previously as we incorporate its latest results, primarily because of the time value of money. For the full year, fiscal 2018 sales increased by 18.9% on a reported basis to $14.3 billion from $12.0 billion previously, with organic sales increasing by 8.4%. For the fiscal fourth quarter, sales increased by 9.2% to $3.8 billion, or 8.7% due to organic growth. Moreover, for the full year, net income increased 8% to $1.06 billion compared with $983.8 million in fiscal 2017. As for the fourth quarter, net income increased 20% year over year to $353.3 million compared with $293.4 in 2017's fiscal fourth quarter.

Parker benefited from continuing strong performance in its aerospace segment, where fourth-quarter sales rose 5.6% year over year to $636.4 million, or 5.5% year over year on an organic basis. Last month, the firm issued a press release touting a win with CFM’s LEAP engine contract, which is a narrow-body aircraft engine produced by a 50/50 joint venture between narrow-moat rated General Electric and French firm Safran. Specifically, the firm plans to use robotic welding techniques to make oil reservoirs for the LEAP engine, clearly benefiting from its intangible asset moat source in the form of trade secrets and patents. Moreover, aerospace is a long-cycle business, and encouragingly, this gives management confidence in its 2019 outlook. Additionally, aftermarket service is a higher-margin business, so it was no surprise that an increasing mix to 19.9% of aerospace sales (versus 18.5% the prior year) drove a 240-basis point improvement 17.3% for the year.

The firm’s international segment also saw margins rise, which helped underlying performance. Segment margins rose 210 basis points year over year for the fourth quarter. On the call, the firm stated it’s working hard in their international operations to encourage a more effective cost base, which to us sounds like footprint optimization, among other initiatives. While some analysts questioned management on international’s "slower" sales growth in the quarter, segment results were in line with our expectations of $5.24 billion. This translated into 20.1% reported growth for the full year (10.2% organic) and 12.1% reported year-over-year growth (10.2% organic) for the fiscal fourth quarter, which we consider strong numbers given: tough comps from last year’s fiscal fourth quarter, and a slight slowdown in Europe, Middle East, and Africa.