Morningstar | Pentair's focus on operational improvements should boost earnings growth over the long run.
Deep experience and innovation have helped Pentair build scale and reputation in a competitive global market for water services. The firm seeks to capitalize on rising demand for clean water that rises along with population, economic development, and resource scarcity.Pentair has steadily reshaped its portfolio over the past decade to build competitive advantages in water purification. The company has broad exposure across applications and end markets and has distinguished itself through innovation and adaptation. It has tailored its approach to the food and beverage market, adeptly customizing filtration and flow processes for microbreweries and restaurants by deftly adapting technologies and systems originally designed for use in larger facilities. This formula has allowed it to build stronger and potentially stickier customer relationships and a profitable long-term business model. One ancillary benefit is a rising share of higher-margin consumables in its revenue mix. Niche acquisitions, along with more technologically advanced filtration methods, should help it penetrate newer end markets. The 2012 merger with Tyco's flow control business created a broader product portfolio, stronger distribution capability, and tax advantages, and furthered its transition to a product and service portfolio, offering more solutions as opposed to individual components. However, it also added commodity products exposure that has necessitated significant further restructuring and divestment activity to stabilize performance and pare debt.On May 1, Pentair split into two companies: a water services entity that retained the Pentair name, and a second spin-off company (nVent) that operates the engineered fasteners, enclosures, and thermal management units. As part of the split-up, longtime CEO and chairman Randall Hogan retired from Pentair and was replaced as CEO by veteran CFO John Stauch.We think the split seeks to upgrade sales efforts and spur organic growth and development via greater focus and improved distribution amid a mixed end-market outlook. We also suspect that the focused structure could facilitate further portfolio reshaping via mergers and acquisitions.
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