A Member of Pat McKeough’s Inner Circle recently asked for his advice on Pentair PLC, a water treatment company that’s diversified into swimming pools, water technology, and flow segments.
Pat likes the firm’s dominant position and rising earnings, as well as its track record of dividend increases and free cash flow generation. However, Pat notes there are headwinds in residential markets including near-term challenges in consumer confidence and economic uncertainty.
PENTAIR PLC (New York symbol PNR; www.pentair.com) makes water-related equipment through three divisions: Flow (fluid treatment and pump products); Water Solutions (commercial and residential water treatment products); and Pool (pumps, filters, heaters and lights).
The pool division is a leader in the North American pool equipment arena (replacements). The water solutions unit deals in filtration/sustainability, and the flow branch manufactures/sells treatment products.
These segments offer four main groups of products and services:
Pool and spa: Solutions to filter, clean and sanitize water, with remote-controlled automation equipment.
Water quality: Water softeners, home filtration systems and UV disinfecting.
Water supply and disposal: Products for residential customers include water supply pumps plus sewage and effluent pumps.
Industrial applications: Solutions for a range of water management, treatment, supply and disposal needs across a wide array of industries such as brewery production, food and dairy, fire protection and industrial spraying.
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On April 30, 2018, Pentair completed the spinoff of its electrical unit, nVent Electric plc. Investors received one nVent share for each Pentair share they held. Following the spinoff, Pentair now focuses on its water-related businesses. nVent (symbol NVT on New York) makes commercial filtration, purification and desalination systems.
Note: After the split, both Pentair and nVent moved sideways before dropping along with the market in March 2020 as the pandemic took hold. Since then, though, both stocks have moved up—Pentair is now up about 127% since the 2018 spinoff, and nVent is up a whopping 184%. (We covered nVent in an earlier IC Q&A and continue to see it as a buy.)
Pentair PLC: Earnings rise thanks to efficiency gains
After the spinoff, in July 2022, Pentair acquired commercial ice machine maker Manitowoc Ice. Excluding the $220 million in tax benefits that came with the purchase, the company paid $1.38 billion.
The purchase enhanced its commercial water filtration business, which serves the foodservice and hospitality industries.
In the quarter ended September 30, 2024, Pentair’s revenue decreased 1.5%, to $993.4 million from $1.01 billion a year earlier. The company raised its selling prices 2.2% to offset rising input costs, however, volumes fell 3.7%. Thanks to an ongoing plan to improve efficiency, per-share earnings before one-time items rose 16.0%, to $1.09 from $0.94.
The stock now trades at a somewhat high 23.9 times the forecast 2024 earnings of $4.28 a share. The company will now raise its quarterly dividend by 8.7% with the February 2025 payment, to $0.25 from $0.23. The new annual rate of $1.00 yields 0.9%. Pentair has now increased the payment to shareholders each year for the past 49 years.
The company benefited from the pandemic as it pushed up demand for swimming pools. That led to a boom in pools being installed at primary residences. While this trend has slowed, even after pools are installed, they require maintenance. This generates recurring revenue. Even so, the Pool division will likely hold back Pentair’s results until consumer confidence returns along with a stronger economy.
Recommendation in Pat’s Inner Circle: Pentair plc is a hold.
