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Morningstar | No Real Surprises in Pentair’s 2Q Results; Maintaining FVE

Nothing in narrow-moat Pentair's latest results alters our fundamental long-term view of the firm. The firm's core sales grew 3% year over year and rose to $780.6 million in the second quarter. Strength in aquatic systems, which rose 10% on a year-over-year reported basis to $276 million, mostly buoyed top-line results. However, filtration solutions, which fell 2% to $262 million, somewhat offset this. Healthy demand and continued penetration in the dealer market helped aquatic systems whereas industrial project weakness somewhat harmed filtration solutions. On the earnings call, management specified that the food and beverage end market was the reason for soft results in filtration solutions, and purportedly a merger in this market that has not yet been completed had an impact on sales.

We think the increases in aquatic systems is indicative of the strength of its installed base and inherent switching costs. At the Electrical Products Group Conference, Pentair claimed a high net promoter score in the high 80s (percent).

Of the approximately $27 million in absolute sale increases year over year, about $14 million was attributable to volume (approximately 2%), $8 million was attributable to price (1 percent), and currency tailwinds aided $12 million (about 2%). A negative $7 million from the net effect of acquisitions and divestitures (or negative 1%) offset these gains. Return on sales for the total firm, which equates to segment income divided by sales (or what most companies refer to as segment margins), expanded 90 basis points to 21.0%. Most of these gains were attributable to organic sales growth, but cost inflation was a significant offsetting factor to the tune of negative $16 million, or negative 2.2%. That said, price increases somewhat tempered cost inflation, although price increases did not fully offset this impact.

Management's outlook for the remaining parts of the year is upbeat and the firm raised its EPS guidance to $2.31, up 19% from previous estimates. Broad-based sales growth is expected across all segments, particularly in aquatics. Cost inflation is expected to continue to have an impact on the firm, but management expects both its core volumes and price upticks to offset these effects, which we think speaks to its intangible asset moat source.