Parker Hannifin delivered fourth-quarter earnings of $1.78 per diluted share, resulting in full-year earnings of $6.26 per share. Both metrics were below our expectations as sluggish global demand in Parker’s end markets continues to stunt revenue growth. Additionally, the company has struggled to keep margins flat, which amplifies the impact on earnings. For 2014, the firm will spend roughly $100 million on restructuring, which should allow the company to pare costs somewhat, although analysts are a bit skeptical of how much there is to cut as Parker did not appear to add a lot of new capacity during the recovery.
Fourth-quarter sales were essentially flat versus the prior year as international industrial revenue and aerospace growth offset weakness in North America. Orders followed a similar pattern as revenue, which should be a headwind for growth during the first half of 2014. Management issued 2014 earnings expectations of $7.35-$8.15 per share. After adjusting for one-time gains and restructuring items, Morningstar estimates are at the bottom end of this range as analysts are a bit conservative in their estimation of the pace of recovery in Parker’s end markets. Additionally, analysts assume that pension expense is roughly at the same run rate as 2013, though higher discount rates may prove our estimate to be too conservative.
While the fourth-quarter report, and for the most part 2013, were rather disappointing for Parker, we are confident in our long-term thesis for the company and continue to see fruits of the company’s efforts to evolve from being a components supplier to an engineered solution provider. Analysts will hold off on making any changes to the company’s fair value estimate until they review the 10-k, which should be released in the coming weeks.