On Jun 27, 2014, we issued an updated research report on Pentair plc (PNR), a diversified industrial manufacturing company that provides products, services and solutions for water and other fluids, thermal management, and equipment protection in the United States, Europe, Asia and other regions.
Pentair’s first-quarter 2014 adjusted earnings increased 26% year over year to 73 cents per share. Pentair reaffirmed its adjusted earnings per share guidance in the $3.85–$4.00 range for full-year 2014. The company also reiterated its sales guidance for 2014, of around $7.7 billion, up 2–3% from 2013 sales. Pentair also expects free cash flow to remain in excess of 105% of net income in 2014.
Even though the energy vertical posted a decline in the quarter, Pentair expects continued strong bidding and quoting activity in oil & gas markets and increased capital expenditure to drive backlog growth and improve order visibility through 2014. Pentair expects energy sales to increase in the range of 2–4% year over year in 2014.
In the industrial vertical, management highlighted an improvement in order trends through the first quarter and expects growth to improve through the balance of the year. Management projects 1–3% year-over-year sales growth in industrial markets in 2014. Residential/commercial sales growth remains healthy driven by contributions from North America, Europe and China. As it enters the seasonally strongest period for its North American residential businesses, Pentair expects the vertical to improve 5–7% year over year in 2014 buoyed by improvement in European and Chinese residential as well as commercial markets.
The food service business continues to experience strong international growth, and beverage systems continues to have a healthy backlog. Pentair expects 6–8% annual increase in the food service and beverage vertical in 2014.
Representing approximately 18% of the company’s sales, Western Europe appears to have stabilized and is no longer a concern. It has shown modest positive growth for the fourth consecutive quarter. The electronics market appears to be recovering and residential/commercial demand is showing signs of stabilization, along with strength in food & beverage vertical.
In May 2014, the board at Pentair raised its annual dividend by 25% to $1.20 per share, the 38th consecutive dividend hike. This represents a payout ratio of 35.6% and a dividend yield of roughly 1.6%. Moreover, during the first quarter, Pentair repurchased 3.5 million of its common shares for $270 million. Pentair completed its $1.2 billion share repurchase program during the quarter. As of the quarter end, Pentair had $880.4 million remaining for share repurchases under the new $1 billion share repurchase program announced in Dec 2013 to be executed through 2016. Further share repurchases will continue to boost earnings.
On the flip side, infrastructure remains the weakest vertical and is expected to post a decline (2–4% year over year) in 2014, weighed down by the weakness in Australia. Economic uncertainty in Australia negatively impacted business results and may continue to do so in the foreseeable future. Canada also remains weak and foreign exchange remains a deterrent.
In the Valves & Controls segment, barring the energy-mining vertical, orders declined in all other verticals with overall orders declining 5% to $566 million. Sales also declined in all the verticals in the segment. For 2014, Pentair expects sales in Valves & Controls to be flat in 2014. Flow Technologies is expected to fall approximately 20% due to a major headwind from the water transport business ($95 million).
Other Stocks to Consider
Pentair currently has a Zacks Rank #4 (Sell). Other better-ranked stocks worth a look in the industrial products sector include AO Smith Corp. (AOS), EnerSys (ENS) and ESCO Technologies Inc. (ESE). While AO Smith sports a Zacks Rank #1 (Strong Buy), EnerSys and ESCO hold a Zacks Rank #2 (Buy).