Everybody likes purity -- whether it's clean water, a clean kitchen, or a bride wearing a white dress. Even though Pall (NYSE:PLL) is having something of a rough go of it for now, an ongoing focus on improved purity throughout a range of industries could spell better opportunity in the future.
As company execs forewarned last week, results for the third quarter weren't great. Revenue was up 6.5%, but net income dropped about 6% (a figure that includes some charges). On an earnings-per-share (EPS) basis, results for the third quarter came in at $0.35 -- slightly below last year's $0.37 performance.
Pall serves a dizzying array of industries, and the quarter was a consummate good news/bad news sort of scenario. While there were pockets of strength in areas like aerospace, water processing, power and petrochemicals, results weren't so stalwart in markets like machinery, life sciences, and microelectronics.
So why do I like anything about an apparently sluggish company that serves some very cyclical markets? There are a few reasons:
First, serving cyclical industries works both ways -- while Pall certainly hasn't been helped by downturns in the aerospace or microelectronics industries, eventual recoveries in those industries will help Pall.
Secondly, there is an ongoing drive for purity and improved filtration across the board. Whether you look at life sciences, microelectronics, power, or industrial markets, customers increasingly demand better filtration. In the case of computer components, for instance, manufacturing tolerances have reached a point in some cases where impurities cannot be tolerated beyond the level of parts per quadrillion (that means one unit of impurity per 1,000,000,000,000,000 units of the substance in question).
Finally, I also believe Pall has a major opportunity in the water business. Nobody is making more water, and fresh water is becoming increasingly polluted. As a result, filtration and purification will become increasingly important for municipal water services around the world. Although Cuno (NASDAQ:CUNO) is more than just a water-filtration company, I suspect that its growing water business was part of what attracted 3M (NYSE:MMM) to make a bid for the company.
It's always tricky to use a buyout premium as a standard of valuation for an industry. So, I don't think you can just slap Cuno's valuation onto Pall and call it a day. That said, Pall carries a valuation similar to Millipore (NYSE:MIL), so I don't think Pall is ridiculously undervalued or overvalued. If some of these cyclical markets turn around, and if the water business continue to grow, as I believe it could, Pall could be an interesting pure play on purity.
For more on the industry, check these out:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
