Parker Hannifin Corporation (PH) has successfully refinanced its credit facility of $1.5 billion for the next five years. Parker is the first single-A rated diversified industrial company to secure favorable credit for a five-year period during the current economic recovery.
Availability of back-up credit from a world-wide group of lenders gives the company the ability to finance acquisitions, invest in global expansion initiatives, and drive organic growth through the funding of research and development initiatives.
We believe PH is a high-quality company that’s showing good execution through its cost saving efforts. While Parker stands to benefit from any recovery in global manufacturing activity, its increased scale in its international business (where Europe represents by far the largest geography) as well as its meaningful aerospace presence increases its late-cycle exposure relative to past economic cycles.
We expect MRO (Maintenance, Repair, and Overhaul) to get a boost from continued deferral of capital investment in new machines. PH’s strong exposure to MRO-type products and ability to convert net income into free cash flows will benefit future earnings.
Although PH operates in fragmented and cyclical markets, its strong distribution system provides an edge over its competitors. We believe this distribution system is likely to result in asset turnover and returns on invested capital above those of its peers, despite the impact of the weak economy. In addition, to stay ahead of competitors, the company emphasizes product innovation and technological improvement.
The global motion control market is extremely fragmented and represents a substantial, ongoing consolidation opportunity. Execution of WIN initiatives (lean manufacturing, supply chain, and strategic pricing) is expected to drive margin improvement. The company markets its products through direct sales employees and independent distributors to customers in virtually every significant manufacturing, transportation and processing industry.
The company’s domestic and foreign operations are subject to significant competitive pressures. To compete successfully, the company’s Industrial Segment and Climate & Industrial Controls Segment must excel in terms of product quality and innovation, customer service, manufacturing and distribution capability and price competitiveness.
Meanwhile, the Aerospace Segment must excel on the basis of technological and engineering capability, quality, delivery and service, and price competitiveness. The financial resources of certain competitors may put the company at a competitive disadvantage. Construction Spending continues to remain weak worldwide, except in Asia.
Parker-Hannifin Corporation is a leading worldwide full-line diversified manufacturer of motion and control technologies and systems, including fluid power systems, electromechanical controls and related components. In addition to motion and control products, the company is also a leading worldwide producer of fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems. Eaton Corporation (ETN) is a major competitor.
We currently have a Neutral recommendation on Parker Hannifin.
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