Pentair Laid Bare
...sixth in a series of Borefolio reviews
by Greg Markus (TMF Boring)
ANN ARBOR, Mich. (Sept. 15, 1998) -- Thanks to the lingering effects of the recently settled Northwest (Nasdaq: NWAC) pilots' strike, what would typically have been a no-brainer 2 1/2 hour trip from my front door in Ann Arbor, Michigan to the entrance of the Willard Hotel, kitty-corner from the White House (a.k.a. Peyton Place on the Potomac), ended up consuming a major chunk of my Sunday -- via Chicago, Cleveland, and Baltimore on Herb Kelleher's LUV-ly airline, followed by a 45-minute drive from Baltimore-Washington Airport to Washington D.C.
After spending Monday on business in the District -- where the "unpleasantness involving the President," as I heard one well-bred partisan euphemize it, was not only Topic A of every conversation but Topics B through K, as well -- I drove back to Baltimore airport to catch a few hours' sleep before retracing my route home today. I spent the night in Linthicum, Maryland, in which lies one of the most confusing airport complexes in North America and the headquarters of last month's jeweled carriage of a telecom company and this month's smashed pumpkin in the road, Ciena Corp. (Nasdaq: CIEN).
As luck and Southwest Airlines would have it, I'm now in Chicago, down the road a ways from the Lisle, Illinois headquarters of the other half of the aborted Ciena merger, Tellabs (Nasdaq: TLAB).
Tellabs saw its market capitalization shrink by one-quarter within a matter of hours Monday after the company noted in a morning conference call not only that the Ciena deal was kaput due to the increasing unlikeliness of shareholder approval following Ciena's meltdown, but also that Tellabs was experiencing some slowing of Asian orders for its products, which would probably trim a penny or so from the company's third-quarter EPS.
I see that shares of Tellabs recovered somewhat today. Not so Ciena. I don't know the condition of the President's stock.
On matters closer to home, the Boring Portfolio rose 1.62% Tuesday. Daily gainers outnumbered losers six to one, with shares of Andrew Corp. (Nasdaq: ANDW) unchanged at $14 1/4. By comparison, the Nasdaq and S&P 500 rose 0.75% and 0.77%, respectively.
Cisco Systems (Nasdaq: CSCO) led the Borefolio's advance. Its stock rose $2 15/16 to $96 5/8 after the company announced it had agreed to acquire closely held Clarity Wireless Corp. for about $157 million in stock. As its name implies, Clarity's technology facilitates high-speed wireless Internet communications. Cisco said it will take a charge of $0.06 to $0.09 per share in its fiscal second quarter in connection with the transaction, which is expected to be completed by November.
As part of our continuing review of our holdings, Monday's Boring report offered my take on the near-term possibilities for Carlisle Companies (NYSE: CSL). Tonight's commentary focuses on the other midcap multi-industry growth company in which we hold an interest, St. Paul, Minnesota-based Pentair (NYSE: PNR). Pentair is the most recent Borefolio addition, with 100 shares having been purchased at $43 1/2 each this past April 14.
With 1997 sales of $1.84 billion, Pentair is a diversified manufacturer operating in three markets: professional tools and equipment, water and fluid technologies, and electrical and electronic enclosures. Pentair operates from 50 manufacturing and distribution locations in North America, Europe, and Asia. The company's stock is a component of the Standard & Poor's Midcap 400.
Like Carlisle, Pentair has produced reliable double-digit growth in sales and profits through a combination of acquisition and internal development while maintaining a strong balance sheet. The company's Delta International and Porter-Cable brands are highly respected in the woodworking and construction trades. With the acquisition of General Signal's pump business last year, Pentair's pump and control valve businesses are collectively among the largest in North America. Pentair's Hoffman and Schroff subsidiaries make everything from desktop workstation cabinets to outdoor electrical and telephone enclosures the size of a Buick.
Pentair's return on equity has increased fairly steadily during the 1990s from 10% to 16.3%. Over the same period, EPS has compounded at an annual rate of 14.4%, excluding non-recurring items. In 1997, consolidated sales increased 17.4% to $1.84 billion, bolstered by strategic acquisitions and continued growth in North America partially offset by a sluggish European electrical enclosure market and the strong dollar. Gross margin was essentially flat at 29.8% in 1997 versus 29.9% in 1996. Operating margin improved slightly from 9.1% to 9.2%, and diluted EPS increased 20.2% to $2.08.
As befits the company's solid financial results, Pentair stock significantly outperformed the S&P 500 and S&P Midcap 400 over the five-year period ending December 31, 1997. Moreover, those superior historic returns came with below-average volatility.
Pentair's current performance targets are a 17% annual return on equity (ROE) and at least 15% annual EPS growth. Consolidated sales are expected to continue to show double-digit percentage gains in 1998. The company has initiated efforts to trim $60 million in internal costs over the next few years.
PNR closed Tuesday at $31 1/4, up $1/2. The stock has recovered from a recent side-trip south of the $30 mark, but it's still off by nearly 30% from our initial purchase price.
You'd figure from the weakness in its stock that something gawd-awful must be happening at Pentair. If so, you'd figure wrong -- at least as far as I can tell. The company posted strong results in both its March and June quarters, with some continuing softness in the enclosures business being more than offset by strength in pumps and, especially, in professional tools. That's the way diversified firms are supposed to work, after all: the idea is that the cyclical aspects of the various businesses will to some degree compensate for one another.
As with Carlisle, if you believe that a major and prolonged economic downturn is in the offing domestically, then Pentair might not be your cup of tea right now (Pentair has relatively little direct international exposure); although with the stock trading at less than 13-times projected 1998 earnings you'll perhaps permit me to suggest that the remaining downside risk is limited.
As for the upside possibilities, U.S. construction shows little sign of a slowdown, high-end power tools are all the rage among Baby Boomer do-it-yourselfers, and the pump market is benefiting from a combination of lousy weather (with consequent residential sump-pump purchases) and municipal and commercial upgrading of water and waste-treatment infrastructure.
My periodic calls to Pentair whenever the share price slumps invariably receive the same reply: business remains on track and management remains entirely comfortable with analysts' earnings projections.
Those projections, according to First Call, are for Pentair to earn $2.45 per share in 1998, which would constitute an 18% improvement over last year. The consensus projection for 1999 is for EPS of $2.83, or a 16% increase over anticipated earnings for 1998. Pentair stock also carries with it a decent dividend, currently annualized at around 2%.
Stock Change Bid ANDW --- 14.25 CGO +1 22.69 BGP + 1/16 27.00 CSL + 3/8 39.06 CSCO +2 15/16 96.63 FCH + 15/16 21.00 PNR + 1/2 31.25 TBY - 1/8 6.56
Day Month Year History BORING +1.62% 12.61% -12.49% 10.12% S&P: +0.77% 8.37% 6.93% 66.93% NASDAQ: +0.74% 11.93% 6.86% 61.21% Rec'd # Security In At Now Change 6/26/96 150 Cisco Syst 35.93 96.63 168.90% 2/28/96 400 Borders Gr 11.26 27.00 139.87% 8/13/96 200 Carlisle C 26.32 39.06 48.39% 3/5/97 150 Atlas Air 23.06 22.69 -1.61% 4/14/98 100 Pentair 43.74 31.25 -28.56% 5/20/98 400 TCBY Enter 10.05 6.56 -34.67% 11/6/97 200 FelCor Sui 37.59 21.00 -44.13% 1/21/98 200 Andrew Cor 26.09 14.25 -45.38% Rec'd # Security In At Value Change 6/26/96 150 Cisco Syst 5389.99 14493.75 $9103.76 2/28/96 400 Borders Gr 4502.49 10800.00 $6297.51 8/13/96 200 Carlisle C 5264.99 7812.50 $2547.51 3/5/97 150 Atlas Air 3458.74 3403.13 -$55.61 4/14/98 100 Pentair 4374.25 3125.00 -$1249.25 5/20/98 400 TCBY Enter 4018.00 2625.00 -$1393.00 1/21/98 200 Andrew Cor 5218.00 2850.00 -$2368.00 11/6/97 200 FelCor Sui 7518.00 4200.00 -$3318.00 CASH $5750.59 TOTAL $55059.97