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We retain our Neutral recommendation on Pall Corp. (PLL - Analyst Report). Judging by the degree of uncertainty the company still faces with regard to foreign currency fluctuation and clouded macro-economic conditions, we think it wise not to be too optimistic about its future performance even with its superior technology, reliable global distribution and notable acquisition strategy.

The company’s diversified business, long-term and steady working histories with its clients and solid product lines helped it establish itself in a formidable position within the industry. Additionally, the company’s remarkable financial returns provide a high competitive edge in its operating industry which includes big companies such as Casella Waste Systems Inc. (CWST - Snapshot Report), TRC Companies Inc. and Donaldson Company, Inc. (DCI - Snapshot Report).

Pall derives significant amount of revenue from the emerging markets, including Latin America, MENA, China, India and Southeast Asia. Of late, the company’s Aerospace segment reported sales of $163 million in the third quarter of fiscal 2012, surging 8.8% y/y, mostly driven by the soaring demand in the Asian market.

As we look ahead, the company continues to see high growth prospects in the developing economies for the quarters ahead.

Pall’s game-changing technologies in areas like electronics and biotechnology are constantly supporting its businesses and setting the stage for further growth. Moreover, the global infrastructure growth, increasing demand for water filtration systems and improvement in the pharmaceutical markets are likely to augment the company’s revenues in the future.

However, the scenario is not really as bright as it appears as certain issues still continue to be troublesome for the company. The company’s existing ERP transition issue caused unexpected delay in the shipment of certain consumables, which in turn is adversely affecting the company’s cost structure.

During the expansion of Pall’s systems business, it faced considerably longer sales cycles with less predictable revenue and no certainty of future revenue streams from related consumable product offerings and services. Hence, any change in Pall’s product mix and pricing is expected to negatively affect its operating results.

The company’s Aerospace segment is likely to be hurt by escalating environmental regulation witnessed by the company’s clients, as well as customer requirements for enhanced equipment reliability and fuel efficiency. Currently, as Pall’s cost structure is subject to the ERP transition issue; the company’s additional expenditure on updating its existing service offerings may appear to be expensive.

Hence, until the situation ameliorates and a brighter picture appears on the scene, we consider it wise to maintain a sideline stance on Pall Corp. In the short run, we have a Zacks #4 Rank on the stock which translates into a short-term Sell rating.

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