Filtration and separation company Pall Corporation (UNKNOWN:PLL.DL) is not often discussed by the investment community, but that doesn't mean that Fools should ignore it. On the contrary, it's one of the most interesting stocks in the industrial sector, as its outlook usually contains a useful read across many industries. In addition, it competes with the units of some giant conglomerates, such as General Electric Company (NYSE:GE) and 3M Company (NYSE:MMM), as well as smaller companies like Donaldson Company, Inc. (NYSE:DCI) and Entegris, Inc. (NASDAQ:ENTG), so its commentary is relevant to them as well.
Pall Corporation's recent second-quarter results
The company's sales were evenly split between life sciences and industrial segments in 2013. The two segments provide Pall Corporation with a nice mix of health care stability and cyclical industrial growth, while its razor-and-blade model means that it can generate long-term sales from consumables (87% of its sales in 2013) provided it expands its installed systems sales.
A quick look at its recent second-quarter sales versus orders demonstrates the underlying trends in the business:
Clearly, the life science segment is outperforming, with total segment sales up 8.3% compared to 0.1% for the industrial segment. Moreover, a breakdown of the three individual components of each segment, demonstrates where the individual industry strengths and weaknesses are.
|Business||Sales ($K)||Change in Constant Currency|
|Food & Beverage||44,054||(0.4)%|
Life science segment
Pall Corporation competes with 3M Purification (the company contributes 6% of 3M's industrial sales) in the biopharma and food and beverage markets, and 3M recorded "good growth" with the company in its recent fourth quarter. Pall also competes with GE Healthcare in the biopharma and medical markets. With regard to the biopharna segment, Pall's management outlined that the its solutions tended to be downstream (production end rather than research and development) , but with big pharma being forced to invest in order to overcome the so-called patent cliff in 2014, it's reasonable to expect good growth in research spending to translate into drug production in future years.
Moreover, end demand appears to be relatively stable for now. Indeed, according to Pall Corporation CEO Lawrence Kingsley, "We didn't see a tremendous fall-off in the back half of last year associated with Big Pharma change dynamics, and we are not seeing a huge pickup".
This segment needs some explanation, because the commentary about the results doesn't necessarily correlate with what the data in the chart above is suggesting. Among Pall Corporation's key competitors in the segment are General Electric (process, aerospace), Donaldson (process, aerospace), 3M (process), and Entegris (microelectronics).
Unfortunately, its largest industrial business (process) is the one with the worst underlying conditions. Pall management affirmed that it hadn't "seen a rebound in industrial capacity expansion" spending, and neither was productivity-based investment "improving in the manner that it had hoped". In fact, Donaldson's management told a similar story around its recent second-quarter results, with its sales of industrial filtration solutions only growing 1%, amid "weak manufacturing capital spending levels".
The decline in aerospace sales was somewhat confusing, because aftermarket sales have been strong for companies like General Electric. However, the weakness was partly due to a tough comparison last year, which contained large non-repeating aftermarket sales. Ultimately, management expects the aerospace pipeline to be strong; in other words, expect some strengthening.
On the other hand, the strength in microelectronics is also somewhat misleading. It would be wonderful for investors in the semiconductor sector (and not least Pall's rival filtration company, Entegris) to conclude that Pall's strong numbers mark a renaissance in the industry. However, management outlined that it was seeing sales strength thanks to its new products, rather than any indication of an uptick in long-term growth. In fact, there was some negative commentary on industry capacity.
Interestingly, Entegris is also likely to achieve growth, but this is because it agreed to buy semiconductor ATMI Inc. in February, with Pall Corporation picking up ATMI's life science business.
The bottom line
In conclusion, Pall Corporation's results indicate strength in biopharma spending, but ongoing sluggishness in industrial capital spending. Process technology spending remains weak, but aerospace should strengthen for Pall. However, the microelectronics industry remains in the doldrums, and Fools should not get too excited, too soon.
As for Pall Corporation itself, the company is undoubtedly attractive, but with a forward P/E ratio of around 25 times its full year earnings to July 2014, it's hardly cheap. Especially when its second-biggest business isn't seeing strong end markets. However, the strength in life sciences spending should be noted by Foolish investors.