On Aug 31, we issued an updated research report on Pentair plc
(PNR - Free Report
) . The company will gain from its restructuring actions, introduction of new products and market expansion. Further, following the separation of its Electrical business, Pentair will operate as a leading global water company focused on smart and sustainable solutions. With well-recognized brands, attractive margin profiles, strong free cash flow generation prospects and opportunities, it is well poised for long-term sustainable growth.
Sound Q2 Results
Pentair delivered second-quarter 2018 adjusted earnings of 71 cents per share, up 18% from the year-ago quarter. Earnings also beat the Zacks Consensus Estimate of 69 cents as well as management’s guidance of 67-69 cents.
Upbeat Q3 and Fiscal 2018
The company’s third-quarter 2018 adjusted earnings per share guidance is pegged at 52 cents. Sales are expected to be around $700 million, up 1-2% on a reported basis and up 4-5% on a core basis compared with the prior-year quarter.
For 2018, Pentair’s adjusted earnings per share guidance is pegged at $2.31 and for sales at $2.95 billion. The guidance reflects the separation of its Electrical business on Apr 30, 2018. Revenues are expected to be up 3-4% on a reported and core basis over 2017.
Poised for Long-Term Growth Post Electrical Business Separation
Pentair has completed the separation of its Electrical business, which is now nVent Electric plc (NVT - Free Report
) . Pentair is now operating as a leading global water company focused on smart and sustainable solutions. With well-recognized brands, attractive margin profiles, strong free cash flow generation prospects and opportunities, both the companies are poised for long-term sustainable growth.
Further, with the cash received as part of the nVent spin-off, the company has reduced debt levels. Notably, debt was at $780 million as of Jun 30, 2018, significantly down from $1.4 billion as of Dec 31, 2018. With strong free cash flow expected for the remainder of the year and low debt levels, the company is well positioned to invest in the business along with exploring strategically aligned tuck-in or bolt-on acquisition targets. It will also aid in returning cash to shareholders.
Investment in Business, Products to Fuel Growth
Pentair’s Aquatic Systems business has a track record of high-single digit core growth. The company plans to make some incremental investments in the business in order to improve growth rate. The company plans to expand its aftermarket product offering and expand presence in the rapidly growing automation space. Aftermarket and upgrade market continues to make up nearly 80-85% of all pool product equipment sold and used by pool owners. This presents growth opportunity for the business. Further, Pentair had revolutionized pool pumps by introducing variable speed technology, 10 years ago. So far, variable speed pumps have penetrated only 20%, consequently leaving scope for growth. Further, there are many other energy efficient products in areas like, lighting, heating and cleaning that present significant runway for growth. The company’s investments will include technology upgrades, digital marketing campaigns, incremental sales resources and dealer tools, as well as working on value propositions and alternative channel support.
However, Pentair has underperformed its industry
’s performance with respect to share price, year to date. The stock slumped 38%, while the industry declined 4%. This can be attributed to the persistent inflation in material and other costs. However, the company will be able to combat this by implementing price increases. Moreover, Pentair’s recent business restructuring initiatives aimed at reducing fixed cost structure and realigning business will contribute to margin growth in 2018. These initiatives will likely lead to improvement in share price in the near term.
The stock is nevertheless significantly undervalued and currently trading at a forward 12-month price-to-earnings ratio of 12.6, which compares favorably with the industry P/E ratio of 17.6. Given that the stock is trading at low valuation levels, it provides an attractive investment opportunity.
Pentair currently carries a Zacks Rank #2 (Buy). Additionally, the stock currently has a Zacks VGM score
of B. Here V stands for Value, G for Growth and M for Momentum. Such a score allows you to eliminate the negative aspects of stocks and select winners. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best investment opportunities for investors. Consequently, the company appears to be a compelling investment proposition at the moment.
Grainger has a long-term earnings growth rate of 12.5%. Its shares have appreciated 50%, year to date.
Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 28%, year to date.
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