Pentair Rides On Buyouts & New Products, Input Costs High
Zacks Investment Research | Sep 17, 2019 03:11AM ET
On Sep 16, we issued an updated research report on Pentair plc (NYSE:PNR) . The company is poised to gain from introduction of products, acquisitions and investments in sync with its growth initiatives in the areas of pool, and residential and commercial water treatment. However, the company’s near-term results will be affected by material and other cost inflation, impact of inventory build-up, weather and fluctuations in foreign currency exchange rates.
Unfavorable Currency & Weather to Impact 2019
Pentair’s adjusted EPS guidance for 2019 is pegged at $2.35, flat compared with 2018. Sales in 2019 is likely to be flat to up 1% on a reported basis and flat to down 1% on a core basis compared with 2018 levels. Unfavorable foreign currency impact will be a negative 1% for the year while acquisitions and divestitures will contribute 2%.
Wet and cold weather delayed pool construction activity in several of Pentair’s key markets. As a result of slower sell-through, inventory levels have not gone down as expected. Results in the upcoming quarters are likely to be affected if the inventory levels are not reduced or if end market growth does not resume.
Pentair has undergone certain business restructuring initiatives aimed at reducing fixed cost structure and commenced business realignment. These actions will contribute to margin growth in 2019. Further, productivity improvement and price hikes implemented to combat higher input costs will continue to aid results.
Investments in Growth, Acquisitions to Drive Growth
Pentair targets free cash flow to approximate adjusted net income in 2019. With strong free cash flow and low-debt levels, the company is well positioned to invest in business and strategic tuck-in or bolt-on acquisitions, and returning cash to shareholders.
In order to improve growth rate, Pentair plans to make some incremental investments in the Aquatic Systems business. The company continues to increase product introductions, inclusive of smart technologies.
Less than 10% of the 5 million installed in-ground pools currently have some form of automation system, representing ample opportunities for growth. Further, aftermarket and upgrade market continues to make up nearly 80-85% of all pool product equipment sold and used by pool owners, making it a lucrative market.
Pentair plans to expand particularly in the areas of pool and residential and commercial water treatment through acquisitions, and focus on China and Southeast Asia. In sync with this, Pentair’s Aquion buyout will help the company expand scope and customer offerings in the residential and commercial water treatment arena.
The company has also acquired Pelican Water Systems, which provides residential whole home water treatment systems. Pelican Water Systems adds new and complementary products and services to the Pentair portfolio enabling it to meet consumers’ residential water needs.
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Price Performance
Over the last three months, Pentair’s shares have gone up 4.1%, compared with the Zacks Investment Research
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