Parker-Hannifin Corporation - Kumquats for Karen

Parker-Hannifin Corporation
Parker-Hannifin is a manufacturer of motion and control technologies and systems for the mobile, industrial and aerospace markets. Industry peers include Emerson Electric, Eaton Corporation, and Honeywell International.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $180.65, with an initial trailing stop set at $168.96. With a current price of $171.53, upward price movement will find resistance at $174 and $177.20, with final resistance found at $180.30. Downward price movement will find support at $167.10 and $163.90, with final support found at $158.40.

Days to Cover
The most recent days to cover number is 2. The days to cover number is a measurement of the company's outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.

The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In the case of Parker-Hannifin, based on the information available as of June 30, 2018, the Company recorded a net provisional discrete income tax cost of $233 million as a result of the TCJ Act being enacted.

The reduction in the corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets and liabilities to reflect their value at the reduced corporate tax rate of 21 percent, which resulted in a decrease in income tax expense of approximately $80 million. The one-time transition tax on undistributed foreign earnings and profits resulted in an increase in income tax expense of $297 million. The company intends to make the election to pay the one-time transition tax over eight years.

The company also recorded deferred tax assets of $679.880 million resulting from $2,633.218 million in loss carryforwards. A valuation allowance of $675.045 million related to the loss carryforwards has been established due to the uncertainty of their realization. Of this valuation allowance, $640.239 million relates to non-operating entities whose loss carryforward utilization is considered to be remote. Some of the loss carryforwards can be carried forward indefinitely; others can be carried forward from three to 20 years. In addition, a valuation allowance of $19.812 million related to future deductible items has been established due to the uncertainty of their realization.

Historically, all foreign undistributed earnings were permanently reinvested in international operations. No tax was provided on such earnings as it was not practicable to estimate the additional tax that might be payable on the eventual distribution. The enactment of the TCJ Act created a territorial tax system significantly reducing the U.S. federal tax cost of future distributions. Although future distributions of foreign earnings to the U.S. should not be subject to U.S. federal income taxes, other U.S. or foreign taxes may be imposed on such earnings. The company has analyzed existing factors and determined it will no longer permanently reinvest certain foreign earnings. On these undistributed foreign earnings of approximately $274 million that are no longer permanently reinvested outside of the U.S., the company has recorded a deferred tax liability of $12 million. The remaining undistributed foreign earnings of approximately $2,700 million remain permanently reinvested outside the U.S. at June 30, 2018.

Of these undistributed earnings, we have recorded a deferred tax liability of $4 million where certain foreign holding companies are not permanently reinvested in their subsidiaries. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the potential distribution of such permanently reinvested foreign earnings.

Operating Income
Income unrelated to a company's day to day operation, such as income tax benefits or income from other sources will distort a company's earnings and consequently its fair value. Investors should always explore the sources of a company's earnings to better understand potential valuation impacts. For Parker-Hannifin 0% of the company's operating income came from income tax benefits, and 3% came from other sources.

Insider Transactions
In the past 12 months, the company has reported 123 insider trades involving 644,775 shares of stock. Of those 123 insider trades, 52 were Buys involving 391,976 shares of stock, and 70 were Sells involving 252,799 shares of stock, creating an insider buy to sell ratio of 1.6 to 1.

Mergers/Acquisitions
There were no company mergers or business acquisitions during fiscal 2018.

Divestitures/Dispositions
There were no company divestitures or business dispositions during fiscal 2018.

Year-Over-Year Metrics
Several year over year metrics that are of interest to many investors are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For Parker-Hannifin, revenue increased by 19%, earnings increased by 18%, free cash flow increased by 19%, debt decreased by 16%, and the stock price decreased by 3%. Year to date the stock price is up 10%.

Future Value
My future (5 year hold) target price for the stock is $306, which is an average annual return of 16%. A prior five year hold of the stock (FY2014- FY2018) would have returned an average of 13% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value
As an on-going concern, my current baseline valuation for the company is $69. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value estimate for the stock is $97. The fair value estimate is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of a AAA rated corporate bond. Value investing initiate, reduce, and terminate targets are derivatives of fair value.

Other Value Considerations
Other value considerations include the PE Ratio, the PEG Ratio, the Price to Book Ratio and the Price to Tangible Book Ratio. For Parker-Hannifin, the PE Ratio is 22, the PEG Ratio is 1.4, the Price to Book Ratio is 4, and the Price to Tangible Book Ratio is (14).

Fair Warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Parker-Hannifin Corporation (NYSE: PH) - FYE 06/2018 - OVER VALUED The stock is currently trading at levels above my most recent $155 terminate target. Please See Linked PDF Worksheet

Financial Data
Financial data used in this report was taken from the most recent SEC 10-K filing as reported to the U.S. Securities and Exchange Commission on 08/24/2018 at 14:00:26 HRS.

Disclosure
I hold no shares of Parker-Hannifin Corporation
Posted on 08/25/18