I often get emails saying "Who cares about valuation? This is a great company." Unfortunately, valuation does matter. Even if you buy a great company, paying too much can sentence you to a period of relative underperformance as the stock works off some of that excess.
Results for the company's fiscal first quarter were basically more of the same, with modest sales growth of 4%. While reported net income rose more than 15%, I calculate that operating income actually fell slightly from last year when you strip out restructuring charges. I wasn't too surprised to see continued solid growth in Asia, but I didn't quite expect to see better sales growth in Europe (3% in local currency) than in the company's Western hemisphere operations (1% in local currency).
Pall's segment operating profits are fairly subdued across the board. Profits in the medical business dropped the sharpest, down about 27%. Only aerospace and microelectronics, which combine for more than 30% of total segment profits, showed improvement, growing 40% and 5% respectively.
Here's a decent business with meager growth and single-digit returns on invested capital. Yet it trades at a trailing P/E around 25, and a price-to-cash flow ratio of over 15. Why, exactly, should I buy this? Especially when I could pay less -- relative to growth, anyway -- for Millipore
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Fool contributor Stephen Simpson owns shares of 3M but has no financial interests in any other stocks mentioned.