Pentair Earnings: Transformation Initiatives Continue to Drive Margin Expansion

We are maintaining our $70 fair value estimate for narrow-moat-rated Pentair PNR after the company reported third-quarter results, as our slightly more muted near-term revenue growth projections were offset by the time value of money. Despite a 7% year-over-year core sales decline in the third quarter, we were encouraged by Pentair’s 140-basis-point year-over-year adjusted operating margin expansion, from 19.6% to 21%, driven by pricing, productivity, and margin accretion from the Manitowoc acquisition.

Compared with the prior-year period, Pentair’s third-quarter core sales were up 1% in industrial and flow technologies, flat in water solutions, and down 21% in pool. The latter had to contend with the ongoing inventory correction in the distribution channel and tough year-over-year comparisons, resulting in a 28% volume decline, partially offset by 7% higher pricing. We think that Pentair’s transformation initiatives drove strong margin expansion across all three segments, especially given the revenue headwinds: 250 basis points in industrial and flow technologies, 510 basis points in water solutions, and 130 basis points in pool.

Management raised the bottom end of its full-year guidance range by a nickel and now anticipates adjusted EPS of $3.70 to $3.75. Pentair’s updated outlook now assumes in a high-teens sales decline in pool (slightly worse than the midteens decline baked into the previous outlook), but we continue to expect the segment to return to growth after channel inventory levels normalize by the end of 2023. We view the headwinds in pool as temporary, following strong growth during the COVID-19 pandemic, and we remain optimistic about the segment’s long-term prospects as we expect it to benefit from opportunities in pool automation and sustainable water solutions.