Pentair Earnings: Price Attainment and Transformation Initiatives Drive Impressive Margin Expansion

Narrow-moat-rated Pentair PNR posted solid first-quarter results, featuring a 7% year-over-year increase in adjusted EPS, from $0.85 to $0.91. We’ve raised our fair value estimate to $64 from $62, driven by our more optimistic operating margin assumptions as well as time value of money.

Pentair’s first-quarter core sales decreased by 3% from the prior-year period, as 11% core growth in industrial and flow technologies and 2% core growth in water solutions was more than offset by a 16% core decline in pool. The latter had to contend with tough year-over-year comparisons, an expected inventory correction in the residential channel, as well as unusual weather impacts. As a result of these headwinds, pool volumes declined by 27% year over year, which was partially offset by 11% higher pricing. The inventory correction will be a drag on pool volumes in the second and third quarters, but management expects the business to return to more normalized conditions after the end of the pool season.

We were encouraged by Pentair’s 330-basis-point year-over-year operating margin expansion, from 17.2% to 20.5%, an impressive result considering a challenging macroeconomic environment and headwinds in the pool business. The margin improvement was driven by price increases, productivity, as well as margin accretion from the Manitowoc Ice acquisition.

After a strong start to the year, Pentair raised the bottom end of its full-year 2023 guidance and now anticipates adjusted EPS of $3.60-$3.70 (up from $3.50-$3.70 previously). The outlook bakes in low-single-digit growth in industrial and flow technologies, midteens growth in water solutions, and a midteens decline in pool. While the pool segment faces significant near-term headwinds, we remain optimistic about the segment’s long-term prospects once inventory conditions normalize, as we believe the business is well-positioned to capitalize on opportunities in pool automation and sustainable water solutions.