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Pentair plc PNR has been benefiting from solid demand in the residential facing business of late owing to the shelter-in-place restrictions amid the COVID-19 pandemic. It is also well-poised to gain from restructuring initiatives, cost reduction efforts and productivity improvement. A strong product pipeline, and plans to expand in the areas of pool and residential and commercial water treatment through investments and acquisitions are likely to act as catalysts. The company’s focus on expanding digital transformation, innovation, technology and brand building are also commendable.
Pentair has an estimated long-term earnings growth rate of 8.2%. The company’s shares have gained 9.3% over the past month compared with the industry and the S&P 500’s rally of 6.6% and 4.8%, respectively.
The company currently has a Zacks Rank #3 (Hold) and a VGM Score of A. 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.
Factors Favoring the Stock
Earnings Surprise History: The company beat estimates in each of the trailing four quarters, the average surprise being 20.1%.
Positive Growth Expectations: The Zacks Consensus Estimate for the company’s 2021 earnings is currently pegged at $2.69, which indicates year-over-year growth of 11%. The estimate for 2022 stands at $2.97 which suggests a year-over-year improvement of 10%.
Positive Estimate Revision Activity: The Zacks Consensus Estimate for the company’s earnings estimates 2021 and 2022 have moved north by 7% and 6%, respectively, over the past 90 days.
Valuation is Cheap: Pentair is currently trading at a trailing 12-month EV/EBITDA multiple of 16.9, while the industry’s trailing 12-month EV/EBITDA is pegged at 28.5. Consequently, the company is undervalued compared with its industry peers.
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 residential markets account for nearly 80% of Pentair’s Consumer Solutions segment’s revenues, the ongoing momentum bodes well.
The company has also been implementing actions to reduce cost structure in the wake of the pandemic induced uncertainty. This along with Pentair’s productivity improvement efforts will drive margins. The company’s restructuring initiatives will also help in reducing its fixed cost structure and contribute to margin growth.
Pentair is focused on expansion particularly in the areas of pool and residential and commercial water treatment through acquisitions. Recently, 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.
During the June-end quarter, Pentair acquired an in-floor pool cleaner company that helped broaden its product offerings. Meanwhile, the company’s Aquion buyout will help Pentair to expand scope and customer offerings in the residential and commercial water treatment arena. Pentair has also acquired Pelican Water Systems, which provides residential whole home water treatment systems, enabling it to meet consumers’ residential water needs. These investments bode well for attractive growth opportunities in the current year.
Pentair is focused on expanding digital transformation, innovation, technology and brand building. The company has a strong product pipeline for 2021. The company is focused on leveraging solid product and technology offerings to help customers deliver smart, sustainable solutions. In the wake of the ongoing uncertainty fueled by the COVID-19 pandemic, Pentair has 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 is pegged at 17.1, higher than the industry’s 11.1X. This further underscores Pentair'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.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector include AGCO Corporation AGCO, Deere & Company DE and Brady Corporation BRC. While AGCO and Deere sport a Zacks Rank #1, Brady carries a Zacks Rank #2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
AGCO has an estimated long term earnings growth rate of 13%. The company’s shares have gained 25% in a month’s time.
Deere has an estimated long-term earnings growth rate of 16%. The company’s shares have appreciated 15% over the past month.
Brady has an expected long term earnings growth rate of 7%. The stock has gained 13% over the past month.
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