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Why Is Pentair (PNR) Down 1.4% Since Last Earnings Report?

Zacks Equity Research
Sempra Energy (SRE) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

A month has gone by since the last earnings report for Pentair (PNR). Shares have lost about 1.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Pentair due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Pentair Q2 Earnings Beat, Sales Miss Estimates, Up Y/Y

 

Pentair delivered second-quarter 2018 adjusted earnings of 71 cents per share, up 18% from the year-ago quarter. Earnings also beat the Zacks Consensus Estimate of 69 cents as well as management’s guidance of 67-69 cents. On Apr 30, 2018, Pentair completed the tax-free spin-off of its Electrical business, nVent Electric plc, and will continue as a global water company.

 

Including one-time items, the company reported earnings of 44 cents per share, in contrast with a loss 2 cents recorded in the year-ago quarter.

 

Net sales went up 4% year over year to $781 million. The figure missed the Zacks Consensus Estimate of $788 million. Excluding the impact of currency translation and acquisitions, core sales improved 3%.

 

Cost of sales climbed 3.8% to $498 million in the quarter from $480 million recorded in the year-ago quarter. Gross profit in the reported quarter was $283 million, up 3.3% from $274 million recorded in the prior-year quarter. Gross margin contracted 10 basis points (bps) year over year to 36.2% in the quarter.

 

Selling, general and administrative expenses flared up 11% year over year to $141 million. Research and development expenses went up 8% year over year to $19 million. Adjusted segment operating income increased 8% to $164 million from $152 million recorded in the year-ago quarter. Operating margin advanced 100 bps to 21%.

 

Segmental Performance

 

Due to the successful spin-off of its Electrical business during the second quarter, the company will now continue to operate as a global water company and will report its results in the following three segments:

 

The Aquatic Systems segment sales rose 8.9% year over year to $276 million. Operating earnings increased 43% to $80 million.

 

The Filtration Solutions segment reported revenues of $362 million, up 13.5% from the year-earlier quarter. Segmental operating earnings went up 6.7% year over year to $52 million.

 

The Flow Technologies segment reported revenues of $242 million, up 2.4% from the year-earlier quarter. Segmental operating earnings increased 10% year over year to $44 million.

 

Financial Update

 

Pentair had cash and cash equivalents of $78.7 million at the end of the second quarter, down from $86.3 million recorded at the end of 2017. The company recorded cash from operations of $177.8 million during the six-month period ended Jun 30, 2018, compared with $84.9 million recorded in the comparable period last year.

 

Guidance

 

Pentair revised its full-year 2018 adjusted earnings per share guidance to $2.31 and sales outlook to $2.95 billion. Revenues are expected to be up 3-4% on a reported and core basis respectively over 2017.

 

Pentair initiated third-quarter 2018 adjusted earnings per share guidance of 52 cents. Sales are expected to be around $700 million, up 1-2% on a reported basis and up 4-5% on a core basis compared to third-quarter 2017. Both projections reflect the separation of its Electrical business, on Apr 30, 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Pentair has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Pentair has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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