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Pentair (PNR) To Spin off Electrical Business, Retain Water

Zacks Equity Research

Pentair plc PNR will spin off its electrical unit, which manufactures enclosures and other products for electrical systems. Instead, the company wants to focus on core water treatment business, which makes treatment and processing systems. The separation will happen in the second quarter of 2018 and is expected to occur through a tax-free spin-off of Electrical by Pentair to its shareholders. Following the news, Pentair’s shares gained 2.48%.

Both the businesses will trade as two independent, publicly-traded companies. The companies will boast of market-leading positions in their respective industries through renowned brands, attractive margin profiles, strong free cash flow generation and compelling growth opportunities.

The Water business, which generated approximately $2.8 billion in sales in 2016, will continue under the Pentair name. The newly formed leading global water company will be focused on smart, sustainable water and fluid processing applications. It will design, manufacture and deliver innovative solutions to residential, commercial and industrial customers. Its main business groups will include Filtration & Process, Flow Technologies and Aquatic & Environmental Systems.

Meanwhile, the electrical business generated approximately $2.1 billion in sales in 2016. It will be turned into a high-performance electrical company focused on improving utilization, lowering costs and maximizing customer uptime. Its industrial enclosures, fastening systems and thermal management technologies help protect sensitive equipment, buildings and critical processes and ensure safety. Strategic business groups include Enclosures, Thermal Management and Electrical & Fastening Solutions. The company will be named at a later date.

Pentair PLC. Price

Pentair PLC. Price | Pentair PLC. Quote

Until the separation is completed, Pentair will continue to pay quarterly dividend and will set appropriate dividend policies for each business following completion.

Following the separation, John L. Stauch, Senior Vice President and Chief Financial Officer of Pentair, will become Water's CEO. Karl R. Frykman, the current President of Pentair's Water segment, will become Water's COO and David A. Jones will become its Chairman. The Electrical company’s CEO will be Beth A. Wozniak who is the current President of Pentair's Electrical segment. Randall J. Hogan will retire as Pentair's Chairman and CEO and will serve as Chairman of Electrical.

Last month, Pentair completed the sale of its Valves & Controls business to Emerson Electric Co. EMR for $3.15 billion.

Though strong U.S. dollar, volatile raw material prices and depressed oil prices remain headwinds, Pentair will gain from industry strength, continued dealer wins and strong product innovations. Further, the company’s focus on price increases will help mitigate cost inflation.

Pentair outperformed the Zacks classified Machinery-Thermal Products sub-industry with respect to price performance year to date. The stock gained 22.1%, while the industry recorded growth of 15.6%.

Pentair currently carries a Zacks Rank #2 (Buy).

Other top ranked stocks worth considering in the same sector are AGCO Corporation AGCO and Caterpillar, Inc. CAT. Both of them flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has an average positive earnings surprise of 40.39% in the trailing four quarters. Caterpillar generated an average positive earnings surprise of 40.25% in the past four quarters.

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