Bernstein Analysts More Bullish On Pentair, Like Company's Cost Controls And Cash Flow

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Bernstein upgraded Pentair plc. Ordinary Share PNR to Outperform from Market-Perform on "cost control, better portfolio, cash flow and moderating headwinds."

Quarterly Results And Outlook

The upgrade comes after the Manchester, Britain-based diversified industrial manufacturer reported better-than-expected quarterly results and reaffirmed its 2016 outlook.

The company's adjusted EPS of $0.76 and revenue of $1.58 billion topped Street view of $0.72 and $1.57 billion for the quarter. For the second quarter, Pentair expects adjusted EPS guidance of $1.08–$1.11, and revenue to be approximately $1.7 billion.

Related Link: Pentair Affirms FY16 Adj. EPS Outlook $4.05–$4.25 Vs. $4.05 Estimated

Pentair kept the full-year adjusted EPS guidance unchanged at $4.05–$4.25 and sees full year 2016 sales of $6.7 billion.

"We believe EPS rises from here, with 10–12 percent growth through 2018, after troughing in 2015, based largely on productivity/M&A contribution with commensurate positive revisions along the way (and achievable guidance)," analyst Steven Winoker wrote in a note.

The company adjusted its portfolio to be less cyclical energy and now weighed more toward residential and commercial sectors, and this helped the results. The company's higher performing segments are water quality systems and technical solutions, while the most pressured segments are valves & controls and flow & filtration solutions.

Analyst Take

"On the tougher energy front, headwinds persist but the rate of change has flattened. We would also point out that our momentum indicators show signs of bottoming," Winoker highlighted.

Expecting an improvement in the most pressured segments from repositioning and self-help, the analyst sees the company resuming buybacks and potentially M&A in mid-2017 once the net debt to EBITDA leverage comes below 3x over the next year. Currently, the leverage stands at 4.1x.

On the valuation front, Winoker said Pentair is trading at about 8 percent forward-free cash flow yield. The analyst thinks "the cash angle is important for the company as they pay debt down quickly" and is not shy returning cash to shareholders and deploying the same for acquisitions.

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Though acknowledging the company's mixed track record on that front, the analyst finds the team "very value oriented and shareholder friendly."

"We think that given our performance expectations for Pentair, we would expect a two to three points of multiple expansion," said Winoker, who raised the price target on the stock to $71 from $56. The $71 target price implies an upside of about 22 percent from Tuesday's closing price.

Separately, UBS has upgraded Pentair to Buy, and increased price target to $70.

Shares of Pentair rose 2.61 percent to $59.82.

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Posted In: Analyst ColorUpgradesPrice TargetAnalyst RatingsTrading IdeasBernsteinSteven WinokerUBS
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