Pentair Earnings: Continued Margin Expansion Despite Pool Headwinds

Following narrow-moat-rated Pentair’s PNR second-quarter earnings release, we’ve raised our fair value estimate to $70 from $64, driven by our more optimistic midcycle operating margin assumptions. Despite headwinds in the pool segment as well as a challenging macroeconomic environment, Pentair delivered a 230-basis-point year-over-year operating margin expansion in the second quarter, from 19.3% to 21.6%, thanks to higher pricing, productivity, and margin accretion from the Manitowoc acquisition. We are encouraged by Pentair’s margin expansion in recent quarters as the firm’s transformation initiatives have started to bear fruit, with margins improving across all three segments.

Pentair’s second-quarter core sales were down 7% from the same period last year, as 9% core sales growth in both water solutions and industrial & flow technologies was more than offset by a 28% core sales decline in pool on 36% lower volumes and 8% higher pricing. The pool business continued to face an expected inventory correction in the residential channel, unusual weather impacts, and challenging year-over-year comparisons. Management said on the earnings call that it continues to expect the inventory correction to be completed by the end of the third quarter.

Pentair raised its full-year 2023 outlook and now expects adjusted EPS of $3.65-$3.75 (up from $3.60-$3.70). The updated guidance continues to assume a midteens sales decline in pool, but management now anticipates mid-single-digit growth in industrial & flow technologies (up from low single digits) and high-teens growth in water solutions (up from midteens). Although the pool business will continue to face headwinds next quarter, we believe that the segment is well positioned to return to growth once inventory conditions normalize.