Analysis of Pentair: a Dividend Aristocrat with a perfect history and a special focus

A segment that at first glance looks completely superfluous, but is instead perfectly durable and stable? That's the main focus of Pentair, which we'll look at today.

Basic overview

Pentair $PNR is a US-based international company that specializes in the manufacture and sale of a wide range of products and solutions in the water, sanitation and energy sectors. The company is divided into three main segments: Water, Building Protection and Industrial. The Water segment focuses on products and solutions in the areas of water purification, filtration, dechlorination systems, and the like. Building Protection offers products and solutions in the areas of fire safety, installation of water treatment systems, and the like. The Industrial segment offers products and solutions for food processing, chemicals, pharmaceuticals, and other industries.

Last month, the company was favored by

Pentair ranks among stable companies with a sustainable business model. The company has a long history and stands out for its high level of innovation and research and development. In 2021, the company had revenues of $3.5 billion and employs more than 9,000 employees worldwide.

Background. At first glance, a slightly more expensive stock

Although Pentair has significant positives, such as its global brand, innovative culture and sustainable business model, there are some risks that could negatively impact its business performance. Some of these risks are:

Dependence on the construction sector: Pentair is largely dependent on the construction sector and on the renewal and renovation of infrastructure. If there is a downturn in this sector, it could have a negative impact on its revenues.

Competition: Pentair competes with many other companies in the water, sanitation and energy sectors. If any of these companies become more successful or offer better products or solutions, Pentair's business performance could be adversely affected.

Foreign Business Risks: Pentair is a global company and does business in many countries around the world. This means that it faces foreign business risks such as currency fluctuations, changes in trade policies, changes in political situations, etc. These factors can have a negative impact on its business performance and profits.

Impact of the Covid-19 pandemic: Like many other companies, Pentair has recently been affected by the Covid-19 pandemic. If the situation continues to deteriorate, it could have a negative impact on its business performance.

Supplier issues: Pentair works with many suppliers and manufacturers. If problems were to arise with any of them, it could have a negative impact on its ability to deliver its products and solutions.

Risk of environmental issues: Pentair is involved in water, sanitation and energy, areas that are very sensitive to environmental and sustainability issues. If there is greater public interest in these issues and a greater emphasis on environmental considerations, this could have a negative impact on Pentair's business performance.

Changes in regulation: Pentair is subject to various water, sanitation and energy regulations. If there are significant changes in these regulations, it could have a negative impact on its business performance.

Pentair $PNR is a dividend aristocrat with 47 years of consecutive increases. Its business revolves around a range of water-based solutions with a particular focus on the swimming pool sector.

Apart from one notable blip, the dividend continues to grow modestly. Source

As of 2023, following a change in segment presentation, the company operates in three business segments: Industrial & Flow Technologies, Water Solutions and Swimming Pools. Together, these three segments contributed total consolidated revenues of +$4.1 billion in fiscal 2022.

Although the pool industry may raise concerns in some people's minds due to its discreet nature, it is important to note that only 20% of the industry is related to pool sales. The rest is largely attributable to repair and maintenance. In addition, 75% of PNR's products are based on exchanges with more than 75,000 business partners.

The emphasis on replacements and maintenance ensures stability and predictability in their recurring cash flows and operating results. While there was a softening of the demand environment in the current year, this was partly due to challenging comparative conditions with the prior year. And despite the challenging environment, the company still finished the year with strong results that were better than expected. As a result, the shares were up 9% on the day the results were released.

While the stock still has some upside potential, it may not be enough to appease most investors. Although the outlook is promising, there are certainly still better investments out there.

PNR's reported net sales in 4Q22 were $1 billion, up 1.4% year-over-year. However, core sales, which exclude the impact of currency fluctuations and the impact of recent acquisitions, declined 3% as volume declines more than offset the favorable pricing environment. The Consumer Solutions segment contributed to the decline in core revenue, which decreased 11% due to a 26 point decline in volume offset by a 15 point price contribution. A difficult comparative environment, plus inventory normalization across many product lines in the residential channel, contributed to the weakness.

Overall, adjusted earnings per share for the quarter were $0.82 per share. While this is down 6% from last year, it still beat guidance for the quarter. Overall, PNR ended fiscal 2022 with full-year revenue growth of 9% and segment income growth of 12%.

The good outlook comes on the back of a likely end to a challenging operating year with difficult comparables to the previous year, which included a reduction in demand. This difference in demand was reflected in Q4 results which included an 11% decline in core consumer sales on a 26% decline in volumes. In addition, management acknowledged that 2023 is likely to be a year of catch-up to the excess demand that was realized from 2020 through the first half of 2022.

Q4 results. Source

Despite the lackluster results, the company still has favorable factors on its side.

First, 75% of its products are for replacement and service. This is coupled with a large installed base of approximately 5.4 million pools with an average age of 20 to 25 years. In addition, only 20% of the industry is made up of new pools. Demand is therefore likely to be recurring and predictable even in down business cycles.

This is evidenced by the strong growth in free cash flow over the last five years. In this timeframe, they have generated $2.0 billion of FCF on 8% compound revenue growth. And looking ahead to 2023, PNR is likely to be in an even better cash flow position due to the improvement in working capital as a result of supply chain normalization.

This should allow them to generate free cash flow growth in line with their historical performance of 100% net income. And in line with previous periods, this will lead to further dividend growth. They have now increased the dividend for 47 consecutive years. And according to analysts, there is minimal belief that this growth streak is in jeopardy. Likely margin expansion in future periods will also improve their current capital position. It is also one of the main catalysts for future share price growth. However, the stock is currently trading at approximately 13.9 times forward earnings. Despite this, I think we can still find better and more enticing deals elsewhere.

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.