On Mar 20, 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. Pentair’s adjusted earnings improved 23% year over year to $1.06 per share in the fourth quarter of 2014 driven by robust margin expansion and strong internal execution.
Pentair lowered the full-year 2015 EPS guidance from $4.20–4.35 to $4.10–$4.25 citing unfavorable impact of foreign currency translation. Full-year 2015 sales are projected to be $6.9 billion, lower than $7.039 billion in 2014. Organic sales are now expected to be up 2–3% (down from previous projection of 2–4%) with 4–5% negative impact from foreign exchange headwinds. Adjusted operating margins for 2015 are expected to expand 90 basis points (bps) as against 110 bps projected earlier.
Management expects 4–6% growth in 2015 in the Residential/commercial vertical (27% of Pentair’s sales) driven by continued strength in the North American residential replacement market and the ongoing commercial construction recovery. The Food & Beverage segment (10% of sales) is projected to grow 5–7% in 2015, mainly driven by strength in beverage and food services markets, further share gains and customer penetration. Within the infrastructure vertical, (less than 10% of Pentair’s total sales), the company foresees modest growth (1% to 3%) in 2015.
However, these benefits will be offset by 5% to 7% decline in the Energy vertical (27% of Pentair’s sales). Oil & gas trends (approximately 19% of sales) remain volatile, particularly in upstream applications where management sees continued project delays and incremental pressure from declining oil prices. Moreover, power (5% of sales) and mining (3% of sales), demand trends remain weak.
Furthermore, in the Valve & Control segment, orders were weak and backlog declined 6% year over year. 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. Valves growth will likely remain under pressure in 2015.
During 2014, Pentair returned $1.4 billion through share repurchases and dividends. The company plans to return a total of at least $440 million in 2015. Through Jan 2015, the company has already completed $200 million share repurchase under its current $1 billion authorization. Pentair’s balance sheet capacity remains over $1 billion. In addition to share repurchases, M&A activity is likely to be resumed in 2015.
Pentair’s execution on the Tyco integration remains on track. The company expects to achieve more than $275 million in synergies at an annual basis by 2015-end. This will be driven by repositioning initiatives, improved sourcing, lean implementation and standardization, as well as modest contribution from sales synergies.
Stocks to Consider
Pentair currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industrial products sector include AO Smith Corp. AOS, ESCO Technologies Inc. ESE and II-VI Incorporated IIVI. All these stocks carry a Zacks Rank #2 (Buy).
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