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Strong Demand & Buyouts Aid Pentair (PNR) Despite Cost Woes

Pentair plc PNR has been benefiting from increased demand for swimming pools as consumers continue to enhance their at-home quality of life by investing in pools. Focus on expanding digital transformation, innovation, technology and brand building and making acquisitions in pool and residential and commercial water treatment will continue to stoke growth. However, cost inflation and supply chain disruptions will likely dent the company’s performance in the near term.

Pentair reported second-quarter 2022 adjusted earnings per share of $1.02, beating the Zacks Consensus Estimate of $1.00 per share. The bottom line improved 21% year over year. Net sales improved 13% year over year to $1.06 billion and outpaced the Zacks Consensus Estimate of $1.05 billion.

Strong Pool Demand to Aid Growth

Pentair has been witnessing strong demand for swimming pools as consumers stayed home amid the pandemic, which triggered the desire to invest in their backyards. The company continues to witness strong momentum in the pool business in the current year. Consumers are enhancing their at-home quality of life by investing in pools, while warmer climates and the emergence of new traveling like Airbnb are encouraging consumers to use pools more. The pool business is benefiting from a large installed base and shift to more autonomous and more energy-efficient pools.

Transformation program to Drive Margins

During second-quarter 2021, Pentair launched a Transformation program to accelerate growth and drive margin expansion. The program, structured in multiple phases, is expected to drive operational efficiency, streamline processes, and reduce complexity while meeting financial objectives. It will also utilize automation to increase productivity. The company is projecting at least 300 basis points of margin expansion by 2025 through the program.

Innovation, Acquisitions to Expand Water Treatment Solutions

Pentair is investing in digital transformation, innovation and technology as well as acquisitions in the high-growth areas of the pool and residential and commercial water treatment, which is commendable. In the Water Treatment business, Pentair is investing in innovative components, such as flat connected valves for water softeners. The company continues to invest in new areas around commercial office water and total water management within its commercial systems business.  Within Water Treatment, the company believes that there are opportunities to rapidly expand its $50 million end-to-end residential services business and reinforce its position in advanced technology and connected solutions in residential point-of-use solutions through its existing technology. Pentair is well poised to gain from these investments over the long term.

This July, Pentair completed the acquisition of Manitowoc Ice from Welbilt, Inc. for $1.6 billion. In March 2022, Pentair entered into an agreement to acquire a leading provider of commercial ice makers, Manitowoc Ice. The strategic acquisition enables the company to enhance and deliver total water management offerings to an expanded network of channel partners and customers. The buyout will expand the company’s commercial water solutions platform and drive growth in the foodservice industry. The acquisition is likely to be accretive to current-year earnings.

Upbeat 2022 Guidance

Pentair expects adjusted earnings per share guidance in the range of $3.70-$3.75. The range indicates year-over-year growth of 9-10%. Sales growth for the year is now projected at approximately 8-10% on a reported basis. Pentair’s productivity improvement efforts and price increases implemented to counter the impact of cost inflation are likely to drive margins. Segment income guidance is to be up approximately 5% to 7%. Pentair expects free cash flow to be equal to 100% of net income in 2022, driven by strong demand and continued disciplined working capital management.

Cost Inflation, Supply Chain to Dent Margin

Pentair has been witnessing inflationary increases due to high demand and a tight supply of raw materials such as metals, resins and electronics and increased logistics costs. Even though pricing actions and productivity improvements will offset these increases, supply chain challenges and inflationary cost pressure are expected to persist in 2022 as well. This is likely to dent Pentair’s margins in the near term.

Price Performance

Pentair’s shares have declined 37.2% in the past year compared with the industry’s loss of 39.6%.

 

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Zacks Rank & Stocks to Consider

Pentair currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Industrial Products sector are Applied Industrial Technologies, Inc. AIT, Greif Inc. GEF and Sonoco Products Company SON. While AIT sports a Zacks Rank #1 (Strong Buy), GEF & SON carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial has an estimated earnings growth rate of 10.9% for fiscal 2023. In the past 60 days, the Zacks Consensus Estimate for fiscal 2023 earnings has been revised upward by 6%.

Applied Industrial pulled off a trailing four-quarter earnings surprise of 22.8%, on average. AIT’s shares have soared 32.2% in a year.

Greif has an estimated earnings growth rate of 37% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 17%.

Greif pulled off a trailing four-quarter earnings surprise of 22.9%, on average. GEF’s shares have risen 18.6% in the past year.

Sonoco has an expected earnings growth rate of 78.3% for 2022. The Zacks Consensus Estimate for the current year’s earnings moved up 18% in the past 60 days.

Sonoco has a trailing four-quarter earnings surprise of 4.06%, on average. SON’s shares have moved up 1.7% in the past year.


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