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Strong Demand to Aid Pentair (PNR) Despite Cost Woes

Pentair plc PNR is poised well to gain solid demand for swimming pools. Focus on expanding digital transformation, innovation, technology and brand building, acquisitions in the pool as well as residential and commercial water treatment will continue to stoke growth. However, lower expected volumes due to the ongoing correction in inventory, as well as cost inflation and supply-chain disruptions will likely dent the company’s performance in the near term.

Low Volumes to Impact 2022 Results

During the first half of 2022, Pentair’s inventory levels had built up in order to support market demand and accommodate the ongoing supply-chain challenges. However, in the third quarter of 2022, it saw the normalization of inventory levels within residential distributor channels. This is expected to impact volume levels for the next few quarters. PNR has also been witnessing inflationary increases in the price of raw materials such as metals, resins and electronics as well as increased logistics costs. Even though pricing actions and productivity improvements will offset these increases, supply-chain challenges and inflationary cost pressure are likely to dent Pentair’s margins in the near term.

Pentair now expects the adjusted earnings per share to be around $3.65 in 2022, down from the prior guidance between $3.70 and $3.76. The guidance was lowered to account for increased foreign currency headwinds, higher interest rates and inventory correction. The guidance nevertheless projects a 7% increase from 2021.

Results to Improve in 2023

The company expects revenues in 2023 to be higher year over year reflecting the contribution from Manitowoc Ice, benefits from pricing actions, and the diversity of its portfolio to offset the ongoing challenges in the residential business and challenges along with foreign currency impact. All these factors, as well as reduced manufacturing inefficiencies, and expected benefits from the Transformation program will help offset higher costs and higher interest rates and lead to year-over-year growth in the company’s earnings per share.

Strong Pool Demand to Aid Growth

Pentair has been witnessing strong demand as consumers are enhancing their at-home quality of life by investing in pools. The emergence of Airbnb and Vrbo has also contributed to the rise in demand for homes with pools. PNR estimates that the pool industry in North America is catering to a large installed base of approximately 5.4 million pools, with the average age of these pools approaching 25 years.

Around 60% of the industrial demand is for repairing, 20% for major remodeling and 20% for new pools. Pentair is poised well to gain from these demand trends in the long term. Also, given that half of the installed pools lack any form of automation, the growing preference for more autonomous and energy-efficient pools will benefit the company as well.

Transformation Program to Drive Margins

During second-quarter 2021, Pentair launched a Transformation program to accelerate growth and drive margin expansion. The program, structured in multiple phases, is expected to drive operational efficiency, streamline processes, and reduce complexity while meeting financial objectives. It will also utilize automation to increase productivity. The company is projecting at least 300 basis points of margin expansion by 2025 through the program.

Innovation, Acquisitions to Expand Water Treatment Solutions

Pentair is investing in digital transformation, innovation and technology as well as acquisitions in the high-growth areas of pool, residential and commercial water treatment, which is commendable. In the Water Treatment business, Pentair is investing in innovative components, such as flat-connected valves for water softeners. Within Water Treatment, the company believes that there are opportunities to rapidly expand its $50 million end-to-end residential services business.

This July, Pentair completed the acquisition of Manitowoc Ice which enables the company to enhance and deliver total water management offerings to an expanded network of channel partners and customers. The buyout will expand the company’s commercial water solutions platform and drive growth in the food service industry. The acquisition is likely to be accretive to current-year earnings.

Price Performance

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Zacks Investment Research

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Pentair’s shares have declined 42.3% in the past year compared with the industry’s loss of 52.7%.

Zacks Rank & Stocks to Consider

Pentair currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Hubbell HUBB, OI Glass OI and Titan International TWI. While HUBB and OI flaunt a Zacks Rank #1 (Strong Buy), TWI carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hubbell has an estimated current-year earnings growth rate of 29.3% from the year-ago reported figure. The earnings estimates have been revised 6.6% upward in the past 60 days. HUBB has an average trailing four-quarter earnings surprise of 10.6%. Its shares have gained 22.5% over the past year.

OI Glass’ earnings surprise in the last four quarters was 14.9%, on average. In the past 60 days, its earnings estimates have increased 14.3% for 2022. For the ongoing year, the bottom line is estimated to grow 6.1% from the previous year level. The OI stock has gained 41% in the past year.

Titan International delivered a trailing four-quarter earnings surprise of 49.6%, on average. Current-year earnings are estimated to grow 161.1% from the year-ago reported figure. TWI’s shares have risen 90.4% in the past year.

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