Pentair (PNR) Gains From Strategic Actions Despite Cost Woes
Pentair plc PNR is gaining from product introductions, acquisitions and investments, which are in sync with its growth initiatives in the areas of pool, and residential and commercial water treatment. This is impressive amid headwinds such as cost inflation and supply-chain issues.
The company’s Transformation Program and solid balance sheet will aid growth in the upcoming quarters.
Shares of this Zacks Rank #2 (Buy) company have gained 27.7% in the past year compared with the industry’s growth of 4.3%.
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Strategic Innovation to Aid Growth
Pentair is focused on boosting digital transformation, innovation, technology and brand building. The company has a strong product pipeline. Its new IF3 pump was soft-launched this year. Backed by positive feedback, Pentair sees this as an opportunity to build on its leading technology position in pool pumps.
The company has embarked on a Transformation program to accelerate growth and expand margins. The program is structured in multiple phases and is expected to drive operational efficiency, streamline processes and reduce complexity, while meeting financial objectives.
The company is targeting to make its return on sales around 23% by 2025 through the Transformation Program from the 18.6% return on sales reported in 2022. Via its transformation initiative, the company has identified more than 400 basis points of targeted margin expansion by 2025, up from the 300 basis points stated earlier. It will also use automation to increase productivity.
Acquisitions to Drive Results
Pentair is focused on expanding, particularly in the areas of pool, and residential and commercial water treatment through acquisitions. In sync with this, Pentair completed the acquisitions of Aquion, Inc. and Pelican Water Systems in 2019.
In December 2020, Pentair acquired Rocean, expanding its core water treatment solutions in the residential and commercial water business. In May 2021, Pentair acquired Ken’s Beverage, Inc, which provided a valuable national direct service network to expand its commercial water treatment business.
The Pleatco acquisition in October 2021 not only added strong aftermarket filtration products to Pentair’s flagship Pool business but also to the Industrial Filtration business.
In July 2022, Pentair completed the acquisition of Manitowoc Ice, a leading provider of commercial ice makers. The strategic acquisition enables the company to enhance and deliver total water management offerings to an expanded network of channel partners and customers.
Solid Balance Sheet Bodes Well
Over the past five years, the company has generated a cumulative free cash flow of more than $2 billion. It has a long-term target to consistently generate free cash flow greater than 100% conversion of net income.
Its total debt to total capital ratio stood at 0.47 at the end of first-quarter 2023. It has no long-term debt maturing for the next few years. Pentair's times interest earned is pegged at 7.3. Its strong balance sheet positions it well to navigate through the current turbulent situation.
Pentair recently announced a 5% hike in its quarterly dividend to 22 cents per share. This marks the 47th consecutive year of the company raising its dividend.
Supply-Chain Issues & Elevated Costs to Hurt Margins
Pentair has been witnessing supply-chain challenges, including increased lead times for raw materials due to availability constraints and high demand. Even though the company has used secondary suppliers and new methods of procurement where possible to mitigate supply-chain pressures, it anticipates these headwinds to persist. Also, supply-chain headwinds may impair the company’s ability to meet demand.
The company expects to incur transformation costs as it continues to implement Transformation Program initiatives. These transformation costs will include and be related to labor restructuring, non-labor restructuring, IT investments, and design and execution charges.
Pentair has been witnessing inflationary increases in the price of raw materials, such as metals, resins and electronics (including drives and motors), and higher logistics, transportation and labor costs.
Other Stocks to Consider
Some other top-ranked stocks from the Industrial Products sector are Hubbell Incorporated HUBB, The Manitowoc Company, Inc. MTW and AptarGroup, Inc. ATR. HUBB and MTW flaunt a Zacks Rank #1 (Strong Buy) at present, and ATR has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hubbell has an average trailing four-quarter earnings surprise of 21%. The Zacks Consensus Estimate for HUBB’s fiscal 2023 earnings is pegged at $13.81 per share. The consensus estimate for 2023 earnings has moved north by 22.5% in the past 60 days. Its shares gained 66.9% in the last year.
Manitowoc has an average trailing four-quarter earnings surprise of 38.8%. The Zacks Consensus Estimate for MTW’s 2023 earnings is pegged at 85 cents per share. The consensus estimate for 2023 earnings has moved 63.5% north in the past 60 days. MTW’s shares gained 49.2% in the last year.
The Zacks Consensus Estimate for AptarGroup’s 2023 earnings per share is pegged at $4.15, up 7.5% in the past 60 days. It has a trailing four-quarter average earnings surprise of 6.4%. ATR gained 12.6% in the last year.
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