Pentair plc. Ordinary Share (NYSE:PNR) is a lesser known dividend aristocrat that most recently boosted its dividend by 5%, representing its 40th consecutive year of dividend increases.
Weak energy markets, slumping commodity prices, and unfavorable foreign currency exchange rates are wreaking havoc on the company, which has seen its stock price plummet by more than 30% over the last year.
However, two of the company’s four segments delivered organic growth last year, and a third is poised to return to growth in 2016. Three of its businesses have also delivered healthy margin expansion, and a well-known activist investor took a 7% stake in the company in mid-2015 (the stock has since sold off by nearly 40%).
PNR is not very popular among the funds tracked by Insider Monkey, as only 23 funds reported long positions as of the end of September. However, these funds amassed nearly 12% of the company’s outstanding stock. Billionaire activist Nelson Peltz’s Trian Partners is one of the funds bullish on PNR and it reported 13 million shares in its last 13F filing.
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Business Overview
PNR was formed in 1966 and is a diversified industrial manufacturing company that sells a wide range of products including valves, water system products, actuators, switches, pumps, filters, enclosures, heat management systems, and more.
By end market, PNR generated 33% of its 2015 sales in the residential and commercial construction, 25% in industrial, 23% in energy, 10% in food & beverage, and 9% in infrastructure markets.
By geography, PNR generated 49% of its 2015 sales in the U.S., 18% in Western Europe, 14% in China / SE Asia / India / Middle East, 13% in the Rest of the World, and 6% in Canada.
Segments
Technical Solutions (33% of sales, 22% segment margin): sells products that guard and protects some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.
Valves & Controls (27% of sales, 13% segment margin): sells valves, fittings, automation and controls, and actuators. PNR acquired most of this segment from Tyco International’s spinoff of its flow control business in 2012. Nearly 60% of this segment is exposed to energy markets, with the remaining 40% selling into industrial markets. Half of the business is aftermarket products and services.
Flow & Filtration Solutions (20% of sales, 13% segment margin): sells solutions for filtration, separation, flow and fluid management challenges in agriculture, food & beverage processing, water supply, and a variety of industrial applications.
Water Quality Systems (20% of sales, 20% segment margin): sells water system products and solutions to meet filtration and fluid management challenges in food & beverage, water, swimming pools, and aquaculture applications.
Business Analysis
While PNR has a number of technologically-advanced products, R&D is not a major competitive advantage (the company spends 1.5-2.0% of its sales on R&D, which amounted to $117 million in 2014).
Instead, the company’s advantages primarily come from its long-standing customer relationships (PNR has 50 years of operating history), focus on profitable niches, reputation for quality, wide assortment of products, technical know-how, and sizable distribution network.
Pentair plc. Ordinary Share (NYSE:PNR) also has a large global installed base, which provides meaningful aftermarket revenue. This business generates less volatile cash flow that can be used for acquisitions. PNR’s markets are highly fragmented, so it has plenty of opportunity to continue consolidating the industry.
Like many other industrial companies, PNR also has its own management system grounded in lean methodologies. PNR began its initial lean deployments in 2005 and believes lean operations are now part of its DNA, driving productivity throughout the enterprise.
The company expects to significantly rationalize its footprint over the next five years by reducing its number of factories and distribution centers by at least 30%. When global growth is slow, these are the levers that industrial companies have to pull to protect their earnings and position themselves for the next upturn.
Management is doing everything they can to pull costs out of PNR’s Valves & Controls business, which is experiencing mid-teens sales declines. There is not much more PNR can do, but management has shown a willingness to shed non-strategic, lousy businesses in the past if it cannot generate a good return.
