Pentair Initiated Neutral At Credit Suisse

The brokerage said Pentair's sales ex-V&C have outgrown EE/MI peers in recent years by about 50bps due to its low exposure to commodity and emerging markets.

"Given signs of a bottoming in the latter, and PNR's late-cycle sales mix, we think this out-growth is unlikely to accelerate. While its markets are strong now, we note that PNR's cyclicality was no lower than the sector average during the 2009 downturn," analyst Julian Mitchell wrote in a note.

That said, Mitchell noted that the company should continue to record strong margin growth, while its operating margins have increased by about 300bps over the past three years.

Related Link: Cowen & Company Downgrades Pentair To Underperform

"We view five business units (-30 percent of sales) as 'under-earning' today, in that they offer 300bps+ of margin expansion opportunity; we assume that two-thirds of this opportunity (equating to $0.18–0.20 of EPS) is indeed realized in the next few years," Mitchell continued.

Meanwhile, investors would focus on how the company deploys its V&C proceeds, while the company is keen to put the remaining balance sheet capacity of $1.4 billion to work.

Mitchell said although the move would add $0.45 to EPS, it would increase the leverage "at the very top of the large-cap EE/MI leverage spectrum (implying ~3X ND /EBITDA), and back to a level which management apparently found too high."

Notably, the main aim behind the sale of V&C was to reduce the leverage.

"There is a risk that PNR uses the proceeds from selling assets that may be close to a cyclical trough (V&C), to buy businesses that may be close to a cyclical peak (in Water, TS), and the company seems willing to return to a similar balance sheet leverage level (3X) as before the V&C sale took place," Mitchell continued.

On the valuation front, the analyst noted that the shares of PNR already trade in-line with water pure-play peers.

Shares of Pentair closed Friday's regular trading at $61.26.

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