Balanced Risk-Reward for Pentair - Analyst Blog

On Apr 4 2014, we issued an updated research report on Pentair Ltd. PNR. This supplier of water and other fluids, thermal management, and equipment protection reported a 62% rise in its adjusted earnings to 86 cents per share in fourth-quarter 2013.

Representing approximately 18% of sales, Western Europe appears to have stabilized and is no longer a concern, growing modestly for the third consecutive quarter. The electronics market appears to be in recovery mode and residential/commercial demand is showing signs of stabilization. Pentair will also benefit from the recent pickup in revenues in fast-growth regions, following mixed results in the prior 3 quarters of 2013. The Middle East and Africa led the way, with China also showing healthy growth. Pentair has made strategic investments in the Middle East and Africa and expects strong growth in those two regions.

In the fourth quarter, 4 of the company's 5 main verticals reported strong growth: residential and commercial increased 9%, energy increased 15%, industrial increased 9% and food and beverage increased 16%. Residential/Commercial sales are expected to continue to grow 4–6% in 2014 on the back of a sustained North American residential recovery, as well as signs of a commercial recovery. Energy sales are projected to increase 3–5% driven by strength in the oil & gas markets as well as Pentair's increasing backlog of power generation related orders.

Industrial sales are expected to increase 1–3% year over year, driven by a return to positive growth in general industrial markets and an improvement in process-related capital expenditure in 2014. Food & Beverage sales are expected to increase 5–7% year over year (y-o-y) in 2014, indicative of continued healthy demand from the company's key beverage customers (beer and global dairy) and agriculture.

On the flip side, infrastructure was the only vertical that posted a decline, as ongoing strength in the North American break and fix pump business and recovery in the European electronics business were offset by tough conditions in Australia. The company expects infrastructure sales to be flat in 2014 compared with 2013.

Pentair predicts first-quarter 2014 adjusted earnings per share EPS in the range of 70 cents to 73 cents. The company expects total sales to be flat to up 2%. Overall sales growth will remain challenged in the quarter due to unfavorable impacts from Australia and Canada. Delay in project activity in these regions along with a foreign exchange headwind from Australia will remain headwinds in the upcoming quarter. Results in the Valves & Controls and Technical Solutions segments will be seasonally lower. Furthermore, orders in Valve & Control's energy-mining vertical will remain a drag.

Pentair affirmed its adjusted EPS guidance in the range of $3.85–$4.00 for full-year 2014. This marked an increase of 20–25% over 2013 adjusted EPS. As of Dec 31, 2013, the company had remaining $150 million available for repurchases. In Dec 2013, Pentair's board of directors authorized the repurchase of shares of its common stock up to a maximum limit of $1 billion. The authorization allows the company to repurchase shares till Dec 31, 2016. Further share repurchases will continue to boost earnings.

In April, Pentair's management increased the annual dividend to $1.00, beginning with quarterly installments of 25 cents in the third quarter of 2013. Pentair intends to seek authorization from its shareholders at its 2014 annual general meeting of shareholders to extend the increased dividend or increase the dividend for the remainder of 2014. This will mark the 38th consecutive year for the company to have increased its dividend.

Other Stocks to Consider

Pentair retains a short-term Zacks Rank #3 (Hold). Some better performing stocks worth considering in the sector include Kadant Inc. KAI, Altra Industrial Motion Corp. AIMC and Broadwind Energy, Inc. BWEN. While Kadant holds a Zacks Rank # 1 (Strong Buy), Zebra Technologies and Broadwind Energy carry a Zacks Rank #2 (Buy).