Parker Hannifin Declines After Profit Margins Narrow

Parker Hannifin Corp., the manufacturer viewed as a barometer of global industry, fell the most in seven months after profit margins narrowed in the last three months of 2010.

Parker Hannifin said total segment profit margin in the second quarter fell to 14 percent, down from a record 15.5 percent in the previous quarter.

Incremental margins, or the profit on each additional dollar of revenue, slipped to 30.5 percent from 40 percent in the previous three-month period.

“The margins were lower than expected, and I think that’s what’s got investors concerned,” Jeff Windau, an Edward Jones analyst in St. Louis, said today in an interview.

Chief Executive Officer Don Washkewicz predicted a 15 percent operating margin for the fiscal year through June, which he noted may be the highest in company history. He said incremental margins would reach 35 percent.

“We think that’s pretty strong,” Washkewicz said.

Parker Hannifin, whose breadth of offerings and 45 percent of sales outside the U.S. make it a barometer for the global industrial economy, fell $5.57, or 6.1 percent, to $85.51 at 4:06 p.m. in New York Stock Exchange composite trading, the largest percentage decline since May 20.

The Cleveland-based company’s decrease is the third-biggest today on the Standard and Poor’s 500 Index. The decline followed a 23 percent gain to $86.30 from October through December.

Analysts said the drop may have been furthered by concern that the company beat earnings estimates because of a lower tax rate and might have trailed them otherwise.

‘Aggressive’ Stock Gains

Parker Hannifin’s tax rate was 24.3 percent compared with 26.2 percent in the year earlier period. Some, including Stephen Volkmann of Jefferies & Co., had predicted a tax rate of closer to 30 percent for the quarter.

“On an operating basis, they actually missed numbers by about 3 cents,” Volkmann, who is based in New York, said in an interview. “All of these stocks have run very aggressively into the quarter, expectations are high and it turns out that the quarter isn’t quite as good on an operating basis as it first appeared.”

Parker, which makes components used in construction equipment, refrigeration, hybrid delivery trucks and aircraft, boosted its full-year forecast after second-quarter net income more than doubled to $230.2 million, or $1.39 a share, the company said today in a statement. Profit was $104.5 million, or 64 cents, a year earlier. Sales climbed 22 percent to $2.87 billion.

Lower Tax Rate

“The fiscal second quarter outperformance was mainly driven by higher other income and lower tax rate than expected,” Andrew Casey, a Wells Fargo & Co. analyst in Boston, wrote today in an investors note.

Analysts had projected profit of $1.29 a share, excluding some items, on sales of $2.74 billion, the averages of estimates compiled by Bloomberg.

Earnings from continuing operations in the fiscal year through June will be $5.80 to $6.20 a share, up from an October forecast of as much as $5.80 a share, the company said today in a statement.

To contact the reporter on this story: Will Daley in New York at wdaley2@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net