On Nov 30, we issued an updated research report on Pentair plc PNR. The company is poised to gain from its focus on cost reduction and investments. However, material and other cost inflation, and fluctuations in foreign currency exchange rates might thwart the company’s growth in the near future.
Let’s discuss the factors in detail.
Pentair to Benefit From Cost Cuts
During fiscal 2017 and the first nine months of fiscal 2018, Pentair underwent certain business restructuring initiatives aimed at reducing fixed cost structure and began realigning business. These actions will contribute to margin growth. Further, productivity improvement and price hikes implemented to combat higher input costs are likely to aid results.
Focus on Investments to Spur Growth
Pentair plans to make incremental investments in the Aquatic Systems business in order to improve growth rate. The company intends to expand its aftermarket product offering and increase its foothold in the rapidly growing automation space. Pentair has launched two automation systems and it continues to increase product introductions, inclusive of smart technologies. Moreover, its investments — including technology upgrades, digital marketing campaigns, incremental sales resources, dealer tools, and working on value propositions and alternative channel support — will drive results.
Inflation to Hurt Results
Pentair continues to witness inflation in material and other costs, which includes the impact of tariffs. The company expects the current economic environment to result in continued price volatility for many of its raw materials. This is likely to dent Pentair’s margins in the near term.
Currency Fluctuation Remains a Headwind
Sales outside the United States accounted for 40% of net sales of Pentair in fiscal 2017. Fluctuation in foreign currency exchange rates, most notably the strengthening of the U.S. dollar against euro, could have an adverse material effect on the company’s revenues. Additionally, currency variations could have an adverse material effect on international margins and margins on sales of products that include components obtained from suppliers located outside the country.
Share Price Performance
Over the past year, Pentair has underperformed the industry it belongs to. The stock has dipped 38% while the industry recorded loss of around 9% during the same time frame.
Zacks Rank & Key Picks
Pentair currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the same industry include Enersys ENS, TriMas Corporation TRS and Flowserve Corporation FLS. While Enersys currently sports a Zacks Rank #1 (Strong Buy), TriMas and Flowserve carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enersys has a long-term earnings growth rate of 10%. The stock has gained around 25% in a year’s time.
TriMas has a long-term earnings growth rate of 5%. The company’s shares have rallied around 12% over the past year.
Flowserve has a long-term earnings growth rate of 17.3%. Its shares have rallied 13% in the past year.
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