Midwest Earnings Preview: Reports from Cleveland

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Readers may recognize I am intimately familiar with the State of Ohio based on my college alma mater. While Ohio’s gross domestic product contracted more sharply than the country as a whole during the 2008-09 recession, data from the US Department of Commerce indicates that Ohio’s economy is now growing faster than the national average. In particular, thousands of new jobs are being created along the Utica Shale, where an abundance of natural gas could sustain our energy future.

Aside from the potential for a local recovery, the Cleveland, OH based companies featured in this article have a presence well beyond the state’s borders. The industrial division at Parker Hannifin is growing internationally, and sales have recovered to nearly their peak 2008 level. The Akron, OH based Firstmerit is now the 7th-largest bank in Ohio, and continues to expand west into Illinois and Wisconsin. And while I feel insurance giant Progressive may be fairly valued, the company still pays a healthy 2 percent dividend yield.

Here’s what I expect from these 3 standout Ohio companies in coming days.

FirstMerit (NASDAQ: FMER)

Tuesday, Jan 22 before open; Consensus $0.32 EPS / Revenue $174.26M

The Akron, Ohio based bank holding company continued its Midwest expansion plans in September 2012 with a $1.3 billion acquisition of Michigan based Citizens Republic Bancorp (NASDAQ: CRBC). The two banks are expected to combine and operate solely under the FirstMerit Bank name franchise. The deal is anticipated to close in the second quarter of 2013 and would cause FirstMerit to become the 7th largest financial institution in the Midwest. Shareholders of Citizens Republic will receive 1.37 new shares of FMER per existing share of CRBC. Citizens Republic will continue trading on the Nasdaq exchange until regulatory approval is completed, and the bank is scheduled to release its own fourth quarter earnings on Tuesday, January 22.

On January 9, Oppenheimer & Co. upgraded to FirstMerit to Outperform with an $18 price target, citing the company’s growth prospects in Illinois, Michigan, and Wisconsin. FirstMerit began its western expansion into Illinois through two government-assisted deals in 2010. FMER also completed the acquisition of 24 new branches in Illinois from First Banks, Inc. through traditional M&A, collectively making it the 16th-largest bank in Chicago.

The mean analyst price target on FirstMerit is $16.05, approximately 7 percent higher than the current market price.

Parker Hannifin (NYSE: PH)
Friday, Jan 18 before open; Consensus $1.14 EPS / Revenue $2.93B

The internationally diversified Cleveland, OH based manufacturer operates in 3 reporting segments: Industrial, Aerospace, and Climate & Industrial Controls.

On January 8, Parker Hannifin received an upgrade to Overweight from JPMorgan with a new $100 price target. The Wall Street firm believes Parker Hannifin’s Industrial segment will benefit from a reacceleration in global economic growth. International sales reached a peak $1.35 billion during the March 2008 quarter, before slipping as low as $837 million during the identical three-month period ending in March 2009. Sales outside the United States have subsequently rebounded to a quarterly $1.18 billion as of September 30, 2012.

The most important economic indicator for Parker Hannifin is the Purchasing Managers Index (PMI) related to manufacturing activity in specific regions around the world. Parker Hannifin’s fiscal year ends on June 30.

Progressive (NYSE: PGR)
Friday, Jan 18 before open; Consensus $0.34 EPS / Revenue $3.79B

At its investor day in June 2012, Progressive management set high hopes on the licensing potential for the company’s usage-based driving technology which is patent-pending. On December 20, Progressive announced a licensing fee of 2 basis points (i.e. 0.02%) of direct premiums written for the technology, which is a disappointment from originally higher expectations. I estimate if Progressive were able to license the technology with a comparable amount of its own direct premiums (an optimistic assumption), the company would earn at most an additional $0.05 in earnings per share.

Wall Street sentiment on Progressive is lukewarm heading into Friday’s earnings report. As of this morning’s writing on January 17, the New York office of investment firm Macquarie has downgraded Progressive to Underperform from Neutral with a new lowered price target of $19.50. The analyst downgrade is based on current market valuation and an anticipated decrease in revenue growth. Progressive trades at slightly more than 2x book value. Macquarie is a global investment banking and financial services firm headquartered in Australia.

On December 7, Progressive declared an annual dividend to be paid on February 1 to shareholders of record as of January 25 (ex-dividend date of January 23). The amount of the variable dividend is contingent on the company’s year-end earnings release this Friday. This annual dividend is unique from the special $1.00 per share payout which was payable before the fiscal cliff.

Economic Data for Friday, Jan. 18

On the economic front, Thomson Reuters and the University of Michigan will release their preliminary monthly “surveys of consumers” on Friday at 9:55 a.m. The final version of the monthly survey will be released in two weeks on Friday, February 1. For the previous month, consumer confidence fell sharply over concerns related to political gridlock and the fiscal cliff.

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johnmacris has no position in any stocks mentioned. The Motley Fool owns shares of FirstMerit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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