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Pentair plc PNR provided details of long-term goals which include delivering annual core sales growth at 2-4% and segment income growth of 6-8%. The company expects to achieve base adjusted earnings per share (EPS) growth of 8-10% annually, which factors in approximately $150 million of share repurchases per year.
Q2, Fiscal 2018 Guidance Reaffirmed
The company affirmed second-quarter 2018 adjusted earnings per share guidance at 67-69 cents provided at first-quarter conference call. It continues to expect second-quarter sales to be approximately $0.79 billion, up 4-5% on a reported basis and up 3-4% on a core basis compared with the year-ago quarter.
The company also maintained fiscal 2018 earnings guidance between $2.25 and $2.30. Sales guidance remains at $2.96 billion, up 3-4% on a reported and core basis over 2017. Further, the company continues to target full-year free cash flow of approximately 100% of adjusted net income.
During fiscal 2017 and first-quarter fiscal 2018, Pentair underwent certain business restructuring initiatives aimed at reducing fixed cost structure and began realigning business in contemplation of the separation of the Electrical business. These actions will contribute to margin growth in 2018. Segment income is anticipated to be up around 8% for the year. Further, both these guidance ranges reflect the separation of its Electrical business, nVent Electric plc.
Share Repurchase Program Announced
Pentair’s Board of Directors has authorized it to repurchase up to $750 million of its common shares. The new authorization expires on May 31, 2021. This new authorization replaces the previous authorization under which $450 million remained available for share repurchases as of Mar 31, 2018.
Electrical Business Separated
Pentair has completed the separation of its Electrical business, which is now held by nVent Electric plc ("nVent"), a new independent, publicly-traded company. nVent shares began trading on the New York Stock Exchange on May 1, 2018, under the symbol "NVT."
The separation will create two industry leading pure play companies in Water and Electrical — Pentair plc and "nVent", respectively. Both the companies are well-positioned for long-term growth and value creation, and also possess the scale and strength to flourish as separate entities. Pentair will continue to operate as a leading global water company focused on smart, sustainable solutions. With well-recognized brands, attractive margin profiles, strong free cash flow generation prospects and opportunities, both the companies are poised for long-term sustainable growth.
However, risks persist in connection with the separation. Pentair will incur certain costs and expenses relating to the spin-off, such as legal, accounting and other professional fees along with ongoing costs in connection with the spin-off, including costs of operating as independent, publicly-traded companies.
Those costs may exceed its estimates or could negate some of the expected benefits. If the intended gains are not realized or costs exceed estimates, it would have an adverse effect on the financial condition. Further, each management team's inability to control additional stranded corporate costs or to deliver a smooth transition might affect near-term business performance.
Material Inflation to Dent Margins
The company continues to witness inflation in material and other costs. The current economic environment is likely to fuel the persisting price volatility for raw materials.
Pentair underperformed its industry’s performance with respect to share price, over the past year. The stock slumped 34%, while the industry recorded a decline of 11%.
Zacks Rank and Key Picks
Pentair currently has a Zacks Rank #5 (Strong Sell).
Some better-ranked stocks in the same space include Caterpillar Inc. CAT, Terex Corporation TEX and H&E Equipment Services, Inc. HEES. While Caterpillar and Terex sport a Zacks Rank #1 (Strong Buy), H&E Equipment Services carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Caterpillar has a long-term earnings growth rate of 13.3%. The stock has appreciated 51% in a year’s time.
H&E Equipment Services has a long-term earnings growth rate of 17.4%. The company’s shares have been up 70% during the past year.
Terex has a long-term earnings growth rate of 20.2%. Its shares have gained 21% over the past year.
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