Trian Partners' Ed Garden: Pentair A 'Prolific Free Cash Flow Generator', 'Will Be Encouraging Management To Talk About Cash EPS' During Earnings

Shares of Pentair plc. Ordinary Share PNR opened strong for trade on Tuesday after news broke out that Nelson Peltz's Trian Partners has acquired a 7.24 percent stake in the company.

Ed Garden, Trian Partners CIO, was on CNBC recently to discuss why the fund initiated such a large stake in Pentair.

Great Value

"Why Pentair? We think in a market that is near all-time highs we found a great value," Garden began. "We have a company that is a leader in its businesses, great brand names, great market shares, strong balance sheet, generate a tonne of cash."

"And we bought it at a very attractive valuation [called] at roughly 14 times cash EPS. So, in a relatively frothy market we are really thrilled about the ability to become one of the largest shareholders in what we think is a great business."

Cash EPS Basis

Garden was asked why he thinks the market is 'relatively frothy' right now. He replied, "Look, valuations are reasonably high. But in this case...we bought a company that as I said is trading at about 14 time cash EPS..."

"The company has a fair amount of intangible amortization which ...is a non-cash expense and therefore GAAP EPS understates the real free cash flow in this business. So, we look at it on a cash EPS basis similar to say a Valeant or a [...]who also tend to be valued on a cash EPS metric. And we think that increasingly the market will look at it that way as well and we will be encouraging management to talk about cash EPS as they announce their earnings in the future."

"So, as I said a prolific free cash flow generator that we bought at a great valuation basically at about a 8 percent free cash flow yield. And in this kind of market, I think, that's real value," Garden concluded.