Along with the 2q results management raised its

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Along with the 2Q results, management raised its guidance for FY18. It now expects full-year adjusted EPS of $9.65- $10.05, up from $9.10-$9.70. The company has scheduled an Analyst Day to review its strategy and outlook for March 7, 2018. EARNINGS & GROWTH ANALYSIS Parker-Hannifin has three primary segments: Diversified Industrial North America (46% of 2Q sales), Diversified Industrial International (37%), and Aerospace Systems (17%). Second-quarter results and outlooks by segment are summarized below. In the Industrial North America segment, revenues rose a sequentially stronger 12.7% on an organic basis (40% including the impact of the $4.3 billion CLARCOR acquisition, completed in February 2017). The adjusted segment operating margin declined 150 basis points to 15.1% as the new business is being integrated. Orders were up an impressive 15%. Looking ahead to the balance of FY18, we expect 20% growth in sales, including contributions from the acquisition. We also anticipate slightly lower margins year-over-year in the 17.0%-17.4% range. Revenue in the Diversified Industrial International segment rose 10.7%, while the adjusted operating margin widened by 110 basis points to 14.2%. Orders rose 13%. Looking ahead to the balance of FY18, we now expect a mid-teens increase in sales, with improved margins in the 15.1%-15.5% range. In Aerospace Systems, organic revenue reversed course and rose 0.8%. The adjusted operating margin widened 250 basis points to 16.0% and orders rose a sequentially stronger 8% compared to the prior-year quarter. We look for low single-digit revenue growth in this segment in FY17. We also expect slightly higher margins in the 16.1%-16.5% range. By markets, management is upbeat on the aerospace, agriculture, construction, distribution, forestry, general industrial, heavy-duty truck, lawn and turf, mining, oil and gas, refrigeration and air-conditioning, semiconductor and telecom. Neutral markets are automotive, power generation, rail and life sciences.
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M ARKET D IGEST - 12 - Management is keeping a close eye on costs. The second-quarter segment operating margin rose 20 basis points from the prior year to 14.9%. Management’s target range for the year is 16.1%-16.5%. Turning to our estimates, based on our expectations for margin improvement and the recent increase in orders, as well as expectations for a lower tax rate (28% this year and 23% next year) we are boosting our FY18 EPS forecast to $9.90 from $9.49. Our estimate implies growth of 22% this year. We are also boosting our FY19 forecast to $11.30 from $10.67, implying growth of 14% as margins continue to recover, revenue improves and the lower tax rate settles in. Our long-term earnings growth rate forecast for PH is 9%. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Parker-Hannifin is Medium-High, the second-highest rank on our five-point scale. The company receives above-average scores on our three main financial strength criteria of debt levels, fixed-cost coverage and profitability.
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