Pentair (PNR) Downgraded to Strong Sell on Weak Outlook - Analyst Blog
On Jun 9, Zacks Investment Research downgraded Pentair plc PNR to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Pentair has been witnessing a downtrend in earnings estimates since reporting first-quarter results on Apr 21.
Pentair’s earnings of 65 cents per share registered an 8% decline year over year due to the slump in oil prices and a strengthening U.S. dollar. Earnings also failed to match the company’s guidance of 75 cents to 77 cents.
Given the significantly slower start to the year and the impact of foreign currency translation, Pentair updated its fiscal 2015 earnings per share (EPS) guidance to $3.78 on expectation of revenues of $6.5 billion. The company had earlier guided earnings in the range of $4.10–$4.25 and sales at $6.9 billion. The current forecasts reflect 1% increase in earnings from adjusted EPS of $3.78 in 2014 and 8% to 9% decline in sales from 2014.
Pentair initiated second-quarter 2015 adjusted EPS guidance in the range of $0.95 to $0.96, down approximately 6% year over year on an adjusted basis. The company expects second-quarter revenue to be approximately $1.64 billion, which would be down around 10% to 11% on a reported basis and 3% to 4% on a core basis compared with second-quarter 2014.
Pentair expects most of its energy-related businesses to remain challenged in 2015, given the fall in oil prices in the second half of 2014. Sales in the Energy vertical (27% of Pentair’s sales) are expected to decline 6–8% in 2015. Oil & gas (approximately 19% of sales) trends remain volatile, particularly in upstream applications where management sees continued project delays and incremental pressure from declining oil prices. Moreover, power (5% of sales) and mining (3% of sales), demand trends remain weak.
In the Valve & Control segment, orders were weak and backlog declined 4% year over year following a 7% decline in the fourth quarter. Over half of this six-month backlog decline resulted from forex headwinds. Core orders declined 15% and total orders declined 22%, including negative foreign currency translation, as orders dipped across all four industries in the quarter. The company does not expect orders to improve during 2015 since projects are being released at a slower pace owing to the global economic uncertainty and low inflationary environment as project owners are taking more time to adequately review costs and risks. Valves growth will likely be under pressure in 2015.
Pentair’s largest vertical, Industrial, representing roughly 29% of sales is expected to register a 4% to 6% decline in sales in 2015 due to slowdown in global capital spending. The infrastructure vertical, which accounts for less than 10% of Pentair’s overall sales, is projected to be 1% to 3% in 2015.
During late 2014 and in the first quarter of 2015, Pentair’s results were negatively impacted by strengthening of the U.S. dollar against most key global currencies. This trend is expected to continue for the rest of 2015.
More importantly, weak first-quarter results have lead to a downslide in its earnings estimates. The Zacks Consensus Estimate for 2015 plunged 10% to $3.72 and for 2016 it moved south 11% to $4.09 over the course of the past 60 days.
Stocks to Consider
While Pentair is not a good investment choice at this particular time, some better-ranked stocks are John Bean Technologies Corporation JBT, Snap-on Incorporated SNA and Capstone Turbine Corp. CPST. All these stocks carry a Zacks Rank #2 (Buy).
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