Pentair plc (PNR - Free Report) is well poised to benefit from restructuring initiatives, innovations and efforts to reduce debt level. Plans to expand in the areas of pool and residential and commercial water treatment through investments and acquisitions are likely to act as catalysts. The company’s focus on expanding digital transformation, innovation, technology and brand building are also commendable. However, water solutions and Industrial & Flow Technologies business will remain affected by the coronavirus pandemic until the situation stabilizes.
Pentair has an estimated long-term earnings growth rate of 5%. The company’s shares have gained 18.5% over the past year compared with the industry’s growth of 18.1%.
The company currently carries a Zacks Rank #3 (Hold) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities.
Factors Favoring Pentair
Earnings Surprise History: The company beat estimates in each of the trailing four quarters, the average surprise being 9.15%.
Positive Estimate Revision Activity: The Zacks Consensus Estimate for the company’s earnings estimates for the third quarter and 2020 have moved north by 9% and 8%, respectively, over the past 60 days. Also, earnings estimates for the next year have improved 6% in the past few days.
Valuation is Cheap: Pentair is currently trading at a trailing 12-month EV/EBITDA multiple of 14.4, while the industry’s trailing 12-month EV/EBITDA is pegged at 20.1. Consequently, the company is undervalued compared with its industry peers.
The company’s pool business has benefited from increased demand for swimming pools amid the shelter-in-place restrictions. Consequently, the company’s Consumer Solutions segment will gain from solid pool demand and improvement in orders this year. Residential businesses will continue to gain from improved demand in the near term, considering this business comprises roughly 60% of its portfolio. It is focused on expanding particularly in the areas of pool and residential and commercial water treatment through acquisitions.
Pentair is also committed to expanding digital transformation, innovation, technology and brand building. In Water Solutions business, it is investing in innovative components, such as flat connected valve for water softeners. The company continues to invest in new areas around commercial office water and total water management within its commercial systems business. It is well poised to gain from these investments over the long term.
During the June-end quarter, Pentair acquired an in-floor pool cleaner company that strengthens its product offerings. Previously, the company acquired Aquion, which will help it expand scope and customer offerings in the residential and commercial water treatment arena. Pentair has also acquired Pelican Water Systems, which provides residential whole home water treatment systems, thus enabling it to meet its consumers’ residential water needs. These investments will drive performance in the current year.
In the wake of the ongoing uncertainty fueled by the COVID-19 pandemic, Pentair has taken measures to enhance liquidity, including implementing cost-saving initiatives and temporarily suspending share repurchases. Its total debt to total capital ratio stands at 0.34 at the end of second-quarter, lower than the industry’s 0.37. Further, Pentair's times interest earned ratio is pegged at 15.4X, higher than the industry’s 11.1X. This further underscores Pentair's potential to meet debt obligations.
Few Headwinds Remains
Pentair’s Water Solutions business is expected to witness slow recovery in the second half as hospitality and commercial offices are likely to remain impacted by the COVID-19 pandemic. The IFT segment’s top line in the current year will continue to be impacted by reduction in capital spending and aftermarket sales orders by commercial and industrial customers.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector include Astec Industries, Inc. (ASTE - Free Report) , Silgan Holdings, Inc. (SLGN - Free Report) and SiteOne Landscape Supply, Inc. (SITE - Free Report) . While IIVI sports a Zacks Rank #1, Silgan and SiteOne carry a Zacks Rank #2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
Astec has an estimated earnings growth rate of 14% for the ongoing year. The company’s shares have gained 73% in a year’s time.
Silgan has a projected earnings growth rate of 31.5% for 2020. The company’s shares have appreciated 24% over the past year.
SiteOne Landscape has an expected earnings growth rate of 18.7% for the current year. The stock has surged 47% over the past year.
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