EUR 850.00 For Business Accounts Only

Morningstar | Pentair Delivers Solid 2Q Results Despite Weather-Related Issues; Maintaining FVE

We maintain our $43 fair value estimate for Pentair after the narrow-moat company delivered solid second-quarter results. Quarterly adjusted earnings per share of $0.69 slightly outperformed consensus expectations and the previously issued $0.63-$0.66 guidance. The announcement does not fundamentally alter our thesis, and we view the stock as modestly undervalued.

The first quarter was challenging for Pentair, as sales were adversely affected by inclement weather and inventory buildup in the firm’s distribution channels. These headwinds continued into the second quarter, as lingering cold and wet weather affected sales in the aquatic solutions segment and the irrigation business. As a result of weather delays, inventory reductions were slower than management had anticipated, and management’s full-year guidance now reflects the need to further work down inventory levels over the next two quarters. Despite weather-related delays, which led to a 2% year-over-year decrease in core sales in aquatic systems, Pentair delivered 1% year-over-year core sales growth, as filtration solutions and flow technologies grew 1% and 5%, respectively, from the prior-year period.

Management reiterated its focus on aquatic systems and commercial filtration. The company seeks to increase the value of its content per pool pad by offering automation solutions, energy-efficient products, and software-enabled devices. We think that connected solutions have the potential to reinforce switching costs in the segment as we believe that offering an ecosystem that integrates multiple Pentair products and allows customers to remotely monitor and control their pools will enhance customer loyalty. On the commercial filtration side, the recently acquired Aquion and Pelican businesses are performing well, and we expect management will continue pursuing similar tuck-in and bolt-on acquisitions to bolster its commercial and residential water filtration business.