Pentair Initiated at Neutral - Analyst Blog


On Jan 10, 2014, we initiated our coverage on Pentair Ltd. ( PNR ) with a Neutral recommendation based on strength in the North American residential and global food & beverage markets, stabilization across Europe, cost synergy from last year's merger with Tyco Flow and consistent share repurchases.

However, lower orders at the Valve & Controls segment, a weak Australian economy and foreign exchange remain concerns for this supplier of water and other fluids, thermal management, and equipment protection.

Why Neutral?

Pentair reported third-quarter 2013 adjusted earnings of 86 cents per share, up 25% from the year-ago quarter. Pentair projects fourth-quarter 2013 adjusted earnings per share in the range of 83-85 cents per share. The company expects synergies from repositioning actions and functional standardization efforts to the tune of $120 million for full-year 2013 and $42 million in the fourth quarter.

Residential and commercial (approximately 24% of Pentair's revenues) sales grew 11% year over year in the third quarter led by the residential construction recovery in North America while Europe is showing signs of stabilization. Even though commercial construction continues to remain weak, management pointed out improvement in Europe and North America. Management expects residential and commercial sales to grow 7-9% year over year in 2013.

Furthermore, during the quarter, Pentair continued to witness strength in the food & beverage markets, wherein sales within the Water & Fluid Solutions segment increased 20%. This vertical is expected to experience progress in the fourth quarter as well.

In addition, the company continues to witness improvement in the infrastructure break/fix business, which should help drive growth. Representing approximately 18% of sales, Western Europe appears to have stabilized.

As of Sep 28, 2013, Pentair had $325 million remaining for share repurchases under its $1.2 billion authorization, which is expected to be completed in 2014. In addition, the company announced a $1 billion share repurchase program to be executed through 2016 in sync with its long-term goal of maintaining a balanced capital deployment policy by returning capital to shareholders through dividends and buybacks, while maintaining the scope for accretive acquisitions. Further share repurchases will continue to boost earnings.

However, on the flipside, Valve & Control orders were down in the third quarter due to delays and weakness in some verticals. In the Energy-Mining vertical, orders were down 35%, Energy-Oil & Gas orders dropped 12% while Industrial process orders were dipped 7%. This will impact results in the fourth quarter.

Overall sales growth also remained challenged in the quarter impacted by soft Australia and Canada sales. Delay in project activity in these regions along with a foreign exchange headwind from Australia had a significant impact on revenues. The volatile Australian economy and foreign exchange pose threats for the fourth quarter as well.

Other Stocks to Consider

Pentair retains a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Zebra Technologies Corp. ( ZBRA ), Pioneer Power Solutions, Inc. ( PPSI ) and Franklin Electric Co., Inc. ( FELE ). While Zebra Technologies and Pioneer Power Solutions sport a Zacks Rank #1 (Strong Buy), Franklin Electric holds a Zacks Rank #2 (Buy).

FRANKLIN ELEC (FELE): Free Stock Analysis Report

PENTAIR LTD (PNR): Free Stock Analysis Report


ZEBRA TECH CL A (ZBRA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: FELE , PNR , PPSI , ZBRA

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