Dividend Stock Analysis – PNR

Welcome to a new stock analysis from DividendDeveloper! My goal in analyzing stocks on this blog is twofold. First, I want to check if a given stock meets my criteria for investing, and if it would make a good investment. Second, I want to expose my readers to companies that they may not have encountered before, whether because the company’s dividend yield is too low, their streak of increasing dividends is not long enough, or it just slipped through the cracks of their screeners.

The company that I will be looking at today is Pentair plc (NYSE:PNR).

Quick Background:

Quoting from the 2013 annual report:

Pentair Ltd. is a focused diversified industrial manufacturing company comprising four reporting segments: Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions. Valves & Controls designs, manufactures, markets and services valves, fittings, automation and controls and actuators. Process Technologies designs, manufactures, markets and services innovative water system products and solutions to meet filtration, separation and fluid process management challenges in food and beverage, water, wastewater, swimming pools and aquaculture applications. Flow Technologies designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and a variety of industrial applications. Technical Solutions designs, manufactures, markets and services products that guard and protect 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.

PNR in its current form was created in 2012 via a merger with Tyco’s flow control business. The new company is now headquartered in Schaffhausen, Switzerland; the US headquarters is in Minneapolis, Minnesota. Of the four main segments PNR operates in, Valves and Controls makes up 33% of sales, Process Technologies makes up 23%, and Flow Technologies and Technical Solutions make up 22% each (Source). Since the industries PNR operates in is very fragmented, the company lists no real noteworthy global competitors in its 2013 10-K. However, Flowserve (FLS), General Electric (GE), Xylem (XYL), and Emerson Electric Co (EMR) may all be considered viable competitors, now or in the future.

For more basic information, check out the company’s website and the above links.

Fun fact: An investment of $10,000 in December 1994 would be worth $87,603.56 today, all dividends reinvested. (Source: FAST Graphs)

Investment Criteria:

So now that we have a basic understanding of who PNR is and what it does, let’s run our basic screening criteria on it, with the help of David Fish’s US Dividend Champions List:

• Pays a dividend: Yes
• Has 5 years of dividend increases: Yes (38 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: No (9.0)
• Has am EPS payout ratio of less than 70%: Yes (39.47%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; January, April, July, October)

Shoot, the Chowder number doesn’t meet our criteria. Can PNR recover in round two with FAST Graphs? Let’s see:

• Has an S&P Quality Ranking of ‘A-‘ or better: No (BBB)
• Has generally increasing earnings over the past 10 years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No

Other Bonus Ratings:

• S&P Capital IQ: 4-star buy
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 7 (optimized score of 7)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Value Line: 3 for safety
  • Scale is 1-5, 1 being best, 5 being worst

Thoughts:

The dividend yield is on the low end of okay at 1.83%, with an annual payout of $1.20. The 10 year average dividend growth rate is 9.1%, and that rate seems generally stable. The 5 year dividend growth rate is 8.1%, the 3 year is 7.1%, and the 1 year is 9.1%. On top of that, excluding the 2012 merger, the stock has split once, a 2-for-1 split in June 2004.

The P/E ratio currently appears mildly elevated at 21.49, but Morningstar has a 1-year forward P/E ratio of 15.1, showing a solid increase in earnings in the coming year.

Gross margins are at 34.10% while the net profit margin is 8.32%, both solid numbers (Source: Scottrade). The PEG ratio is decent at 1.5. The price/book ratio is 2.21, and the price/sales ratio is 1.71. In general, 2013 was a good year. Adjusted operating income “grew 93 percent to $944 million”, and PNR “[d]elivered record sales of $7.5 billion, with revenue growth of 69 percent”. Debt is still at acceptable levels, as their debt-to-equity ratio is .48. The company generated $751 million in free cash flow in 2013, which is slightly concerning, considering PNR says they “[r]eturned over $900 million to shareholders through dividends and share repurchases” during the same time frame (Source).

Morningstar rates stewardship of PNR as ‘standard’, contrasting the company’s ability to reward shareholders and renewed focus on water systems with the possibility that management has paid an excessive amount for recent acquisitions. The economic moat is rated as ‘narrow’. This accounts for PNR’s first-mover advantage in water system research and high margins in certain segments. The negatives include the fragmented nature of and amount of competitors in the industry, as well as the potential for replication of PNR’s technology.

For the next five years, it’s projected that earnings for PNR will grow 15.5%, and the five year estimated total return is 12.8%, which is pretty good for a industrial company. This may result from PNR’s solid position in the water industry, which is expected to undergo massive growth in the coming years as the world’s population increases. For comparison, FLS’s five year ETR is 9.7%, GE’s is 9.9%, XYL’s is 10.1%, and EMR’s is 10.6%.

Some good SeekingAlpha articles on PNR can be found here (bullish) and here (bullish).

Final conclusion:

I do not believe PNR is an attractive investment. I feel it is a good company, and should grow nicely in the coming years, but I just can’t bring myself to buy at this price point. It fails too many criteria, indicating it wouldn’t be the best investment right now. As a result, I’ll wait for a decline in share price. Since some people like price points, here’s what I would do (rough estimates based on FAST Graphs):

• Buy a full position at: $50.00 or below
• Add to/accumulate between: $50.00 and $65.00
• Hold only at:  $65.00 or above

What do you think? Does PNR make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: None.

All data is accurate as of market close, 10/06/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Image source is available here. Data source is FAST Graphs or company materials, unless otherwise indicated.

Tags: dividend-stock-analysis, Pentair plc, pnr