Limited Upside Seen For Parker-Hannifin, Analyst Steps To The Sidelines

Morgan Stanley said in a note Monday Parker-Hannifin Corp (NYSE: PH) shares have seen their relative multiple peak following their strong outperformance since the election. The firm said conservative guidance and margin expansion are likely well understood parts of the story.

Therefore, Morgan Stanley sees a more balanced risk-reward here. Accordingly, the firm downgraded shares of Parker-Hannifin from Overweight to Equal Weight, but the price target was nudged up from $187 to $188.

Analysts Nigel Coe and Jiayan Zhou noted that the short-cycle momentum of the stock has crested. While acknowledging the strong management execution to-date, the firm said the narrative now shifts away from structural upgrade thematic, namely margin expansion and growth acceleration and toward decelerating organic growth in the second half of 2018 (see Coe's track record here).

The analysts see limited upside from multiple re-rating, given historical trends. The analysts noted that the Parker-Hannifin sees its relative multiple peak vs the broader EE/MI group several quarters in advance of peak organic growth outperformance.

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With no meaningful organic growth outperformance seen beyond the first half of 2018, the analysts believe concerns around peaking short cycle trends could continue to dominate the narrative, as opposed to the longer-term margin expansion opportunity. This represents an incremental risk to the multiple as this deceleration takes hold, the firm said.

Meanwhile, the firm believes estimates are broadly achievable. The firm, however, said the bull case for multiple re-rating is relatively weak.

The firm said, at this point in the cycle, it cannot ignore Parker-Hannifin re-rating to date. Also, the firm no longer sees scope for the name to expand its relative premium to the broader EE/Multi-industry group in light of the peaking short cycle momentum.

On balance, the firm said it still sees scope for the stock to be well supported on the back of a solid outlook for earnings into 1Q/2Q results.

"However, with a high bar and the outlook for tougher comps into the back half, we would rotate more towards stories that have a credible path towards accelerating organic growth, e.g., Eaton Corporation, PLC Ordinary Shares (NYSE: ETN), where the relative valuation vs. PH screens as attractive," the firm said.

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