Pentair: Sitting in the Water

It's tough not to pull for Pentair. The CEO, Randy Hogan, and the rest of the company's leadership showed guts two years ago by selling Pentair's lagging tool business and reinvesting in water-related businesses -- filtration systems, pool supplies and pumps. That's now about 75% of the company's business. The other 25% is "enclosures" to protect electronic equipment. But H20 is the thing and the stock -- forgive the expression -- is treading water. After an early-year advance from $34 to $41, Pentair (symbol PNR) is back to $33, not far above the 52-week low of $30 and well under the $40 to $45 range it held for most of 2005.

In some ways, this mirrors what's happened in the overall stock market. And if you adopt a pure value perspective, $33 seems to be a great price for this fine company. Nothing on Pentair's balance sheet or cash flow statement suggests serious problems. The stock yields 1.7% and the Golden Valley, Minn., company regularly raises dividends by 10% a year. Pentair hasn't had any controversies with the quality of its products. CEO Hogan is a well-spoken engineer by training who answers questions fully and patiently. He uses phrases like "in good stead" and "moving apace" to describe the businesses and is careful not to promise more than he thinks the company can deliver.

So when Pentair reported a mildly weaker first quarter than most of Wall Street wanted, it was sad (though not a shock) to see the stock get dumped just as hard as a much-less-likeable company. The May-June market correction followed, dispelling hopes for a fast recovery. So it's fair to ask: Is Pentair too much of a plodder to do any better than just follow along wherever the market goes?

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Getting back to the numbers, analysts, on average, see Pentair earning $2.11 per share this year, according to Thomson First Call. That would mark a 20% gain from last year's $1.76. But Pentair needs a powerful second half to make $2.11. The average estimate for 2007 is $2.60 a share, a 23% jump over the '06 figure. So, at $33, you're paying 16 times this year's profit estimate and 13 times next year's. A recent JPMorgan report compares the value of Pentair's stock to a half-dozen other companies that have major water businesses. Most of them sport price-earnings ratios in the low 20s.

But at the same time, Morgan reports that Pentair's return on capital is lower than most of its peers, so Pentair's discounted price-earnings ratio seems to be justified. That means that for the shares to appreciate faster than the overall market, the company will need either to boost the growth rate of its businesses by selling new products or through acquisitions that add to growth. Meantime, most analysts peg Pentair's long-term earnings growth rate at 12% to 15% a year. In sum, Pentair isn't spectacular; its stock is unlikely to shoot the lights out. But is a solid and steady holding, one that's suitable for patient investors.

--Jeffrey R. Kosnett