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Morningstar | Pentair Issues Disappointing 1Q Results and Cuts Full-Year 2019 Guidance; Maintaining FVE

Narrow-moat Pentair announced that first-quarter sales declined 6% year over year while adjusted earnings of $0.43 per share fell well short of previously issued guidance of $0.52-$0.55 per share. Despite disappointing results, we maintain our $43 per share fair value estimate as management warned in a preliminary first-quarter earnings release on April 9 that earnings would miss consensus. As such, our fair value estimate already included revised top- and bottom-line near-term projections, as discussed in our April 9 note.

Management blamed poor first-quarter results on inclement weather, which had an adverse impact on revenue in the aquatic solutions segment (down 6% year over year) as well as the agricultural precision spray business in the flow technologies segment (flat from the same prior-year period). Furthermore, sales were affected by inventory build-up in Pentair’s distribution channels, as sell-through levels in the first quarter were below management’s expectations. As a result, the company lowered its adjusted earnings per share guidance for full-year 2019 to $2.30-$2.35 per share from a previously issued guidance range of $2.50-$2.60 per share.

While the announcement is disappointing, we remain optimistic about Pentair’s prospects as we expect its water business to benefit from favorable long-term trends. Despite temporary setbacks, we think the high-margin aquatic solutions segment has solid organic growth prospects, and we expect the company to continue pursuing strategic bolt-on and tuck-in acquisitions, such as the Aquion and Pelican Water deals which closed in the first quarter, to bolster its residential and commercial water treatment portfolio.