Streetwise

Lauren Rudd

Sunday, April 29, 2012

Pick Some Low Hanging Fruit

The rhetoric is becoming increasingly caustic as both sides of the political aisle begin to lob incendiary remarks at one another in earnest. Each side faults the other’s ideas for economic growth, while the general public remains perplexed and confused over what is perceived as an economic quandary with no clear path to a better future.

Much of the public’s bewilderment derives from the continual and unfathomable lack of judicious fiscal legislation embracing a combination of both higher tax revenues and fiscal expenditures directed at job creation. Mimicking the French proletariat by bringing back the guillotine for the purpose of beheading social programs that help the needy or contribute to our intellectual advancement is not the answer.

Although we would like to blame Big Government and Wall Street for all our ills, up to and including “original sin,” remember, “We have met the enemy and he is us.” So where does this turbid economic outlook leave you and your portfolio? That answer is easy; there is still plenty of low hanging investment fruit just asking to be picked.

A good example is a company I never written about before but appears to have the wherewithal to create some serious shareholder value going forward. Parker Hannifin (PH) is a global leader in motion and control technologies, providing precision-engineered solutions for a wide variety of mobile, industrial and aerospace markets.

With annual sales exceeding $12 billion in fiscal year 2011 and employing approximately 58,000 people in 47 countries around the world, Parker has increased its annual dividend for 56 consecutive years, enabling it to claim one of the top five longest-running dividend-increase records among the S&P 500 companies. For a little frosting on the cake, Parker just announced a 5 percent increase in its dividend payout.

Looking at third quarter results, sales rose 4.7 percent to $3.39 billion, a record number that exceeded Street expectations. Unfortunately, while North American industrial sales, profits and orders were all higher, the reverse was true internationally.

Although the Company did benefit in part from a favorable resolution of prior year tax filings, recognition must be given for net income that hit an all-time quarterly high of $312.7 million, an increase of 11 percent over the same period a year ago. Third quarter earnings per share also hit an all-time quarterly high of $2.01, an increase of 19.6 percent over the same period a year ago.

Cash flow from operations for the first nine months of fiscal 2012 amounted to $1.006 billion, or 10.3 percent of sales, compared with $799.9 million, or 9.0 percent of sales, for the first nine months of fiscal 2011.

In its guidance going forward, the Company increased its forecast for earnings from continuing operations to between $7.30 and $7.50 per share, resulting in a forward P/E of less than 10.5, or a 30 percent discount to its historical average.

The consensus price target for the shares is $91. Credit Suisse has an "Outperform" rating and a $94 price target, while Standard & Poor’s has a "Buy" rating and a $100 a share price target.

The Company has an A rated balance sheet and sells for around 9 times operating cash flow. Return on invested capital came in at just under 16 percent in FY 2011.

Along with its earnings release, Parker also announced that it had signed an agreement to acquire the Olaer Group. Olaer is a leading manufacturer of a broad range of advanced hydraulic accumulator and cooling technologies with annual sales of approximately 150 million Euros ($200 million) and employs 550 people.

A discounted earnings model yields an intrinsic value for the shares of $101, utilizing a 15 percent discount rate and a 7.50 percent growth rate. The more conservative free cash flow to the firm model suggests an intrinsic value of $152 per share, using a discount rate of 8.20 percent, which is the Company’s weighted cost of capital. The shares recently closed at $87.96.