Pentair's 2014 Growth Story Riddled with Challenges
On Nov 28, 2014, we issued an updated research report on Pentair plc (PNR), a diversified industrial manufacturing company that provides products, services and solutions for water and other fluids, thermal management and equipment protection in the United States, Europe, Asia and other regions.
Pentair’s third-quarter 2014 adjusted earnings increased 22% year over year to $1.00 per share. Earnings came above the upper end of the company’s guidance range of 93 cents to 95 cents.
For 2014, even though Pentair lowered its revenue guidance to $7.1 billion from $7.15 billion (an annual increase of around 1% to 2%), it raised its adjusted earnings per share (EPS) guidance to the new range of $3.72–$3.74 from $3.65–$3.70.
The revised EPS guidance reflects the solid third-quarter results as well as strong margin improvement expectation for the fourth quarter. Moreover, the guidance represents an increase of around 22% over 2013 adjusted EPS of $3.05. Additionally, Pentair projects fourth-quarter 2014 EPS in the range of $1.02 to $1.04, up around 20% from the prior-year quarter. Fourth-quarter revenues are expected to be approximately $1.86 billion, up 1% to 2% year over year.
Pentair’s industrial vertical is expected to grow on account of improving process orders in North America and strong quoting activity on the back of lower energy and feed-stock (natural gas) prices. Residential/commercial sales growth remains healthy driven by continued strength in the U.S. housing market and the ongoing commercial construction recovery.
During the first three quarters of 2014, Pentair repurchased 11.8 million of its shares for $850 million. As of the third-quarter end, the company has $300 million remaining under its $1 billion share repurchase program, authorized in Dec 2013, which it expects to complete in the fourth quarter. Further share repurchases will continue to boost earnings.
On the flip side, in the Valve & Control segment orders were weak and backlog declined 6% yoy. Given global economic uncertainty and a low inflationary environment, projects are being released at a slower pace as project owners are taking more time to adequately review costs and risks. This has led to an increased tendency of orders slipping into later periods, suggesting more moderate revenue growth for 2015.
In the Energy vertical, power and mining markets remain weak. Management expects energy sales to decline 2% yoy in 2014. In addition, persistent slowing demand in agricultural markets will weigh on the food & beverage vertical. The infrastructure segment will be affected by the continued sluggishness in municipal spending.
Through 2013 and the first three quarters of 2014, Pentair witnessed material and other cost inflation. The company anticipates that the current economic environment will cause volatility in the price of several raw materials to continue. Even though commodity prices have begun to moderate, the timing and impact of these market changes are uncertain.
Other Stocks to Consider
Pentair currently has a Zacks Rank #3 (Hold). Some better-ranked stocks worth a look in the industrial products sector include Zebra Technologies Corp. (ZBRA), John Bean Technologies Corporation (JBT) and AO Smith Corp. (AOS). While Zebra Technologies sports a Zacks Rank #1 (Strong Buy), John Bean Technologies and AO Smith Corp carry a Zacks Rank #2 (Buy).
Read the Full Research Report on AOS
Read the Full Research Report on PNR
Read the Full Research Report on ZBRA
Read the Full Research Report on JBT
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