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Pentair plc PNR has been benefiting from forecast-topping fourth-quarter 2020 results and solid demand in the residential facing business owing to pandemic-induced shelter-in-place restrictions. It is also well poised to gain from restructuring initiatives, cost-reduction efforts and productivity improvement. A solid product pipeline, and plans to expand in the areas of pool and residential and commercial water treatment are likely to act as growth catalysts.
Pentair has an estimated long-term earnings growth rate of 8.8%. The company’s shares have appreciated 96.8% over the past year compared with the industry ’s rally of 111.8%.
The company currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Favoring the Stock
Earnings & Sales Top Estimates in Q4: Pentair reported fourth-quarter 2020 adjusted earnings per share of 70 cents, beating the Zacks Consensus Estimate of 63 cents. The bottom line improved 3% from the 68 cents reported in the prior-year quarter. Net sales of $796 million also surpassed the Consensus Mark of $751 million and improved 5% year over year.
Earnings Surprise History: The company has a trailing four-quarter average earnings surprise of 21.7%.
Upbeat Guidance: Given the anticipated gain from Pentair’s residential focused businesses, management projects adjusted earnings per share between $2.60 and $2.75 in 2021. The mid-point of the guided range suggests 7% growth from the adjusted earnings of $2.50 in 2020. For first-quarter 2021, the company estimates adjusted earnings per share to lie between 55 cents and 63 cents. The mid-point of the range calls for a year-over-year jump of 13%.
Positive Growth Expectations: The Zacks Consensus Estimate for the company’s 2021 earnings is currently pegged at $2.74, which indicates year-over-year growth of 9.6%.
Valuation is Cheap: Pentair is currently trading at a trailing 12-month EV/EBITDA multiple of 17.9, while the industry’s trailing 12-month EV/EBITDA is pegged at 30.7. Consequently, the company is undervalued compared with its industry peers.
Pentair continues to witness robust improvement in its residential facing businesses, which is expected to continue in the current year. The company’s pool business has been gaining from increased demand for swimming pools amid the shelter-in-place restrictions triggered by the COVID-19 pandemic. Considering that nearly 80% of Consumer Solutions segment serves residential markets, the ongoing momentum bodes well for the segment. The company has been implementing actions to reduce cost structure in the wake of the pandemic-induced uncertainty. Additionally, Pentair’s productivity-improvement efforts, will drive margins.
Management is focused on expansions, particularly in the areas of pool and residential and commercial water treatment through acquisitions. In December 2020, the company acquired Be the Change Labs, Inc., (Rocean) in a bid to expand its core water treatment solutions in the residential and commercial water business. In 2019, Pentair acquired Aquion and Pelican Water Systems, which helped it expand scope and customer offerings in the residential and commercial water treatment arena. These investments bode well for solid growth opportunities in 2021.
Pentair has also taken measures to enhance liquidity. Its total debt to total capital ratio stands at 0.28, lower than the industry’s 0.34. Further, Pentair's times interest earned ratio has improved in the last few quarters and is currently pegged at 19.1X. This further underscore the company’s potential to meet debt obligations.
Few Headwinds Remains
Pentair’s commercial systems business has significant exposure to restaurants and hospitality, which remains impacted by muted demand due to weak hospitality and restaurant industries. Moreover, the company’s commercial and industrial businesses are likely to remain challenged this year due to reduction in capital spending and aftermarket sales orders by commercial and industrial customers.
Stocks to Consider
Better-ranked stocks in the Industrial Products sector are Deere & Co. DE, AGCO Corporation AGCO and Dover Corporation DOV, each carrying a Zacks Rank #2, currently.
Deere has a projected earnings growth rate of 82.5% for fiscal 2021. Over the past year, the company’s shares have appreciated 133.2%.
AGCO has an estimated earnings growth rate of 29.9% for the ongoing year. The company’s shares have surged 134.1% in the past year.
Dover has an expected earnings growth rate of 13.7% for 2021. The stock has gained 38.7% in a year’s time.
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