Pentair Can See Further Upside

Investment Thesis - The company reported Q2 2024 earnings with a rebound in the Pool segment, which saw a 17.1% Y/Y sales increase, while the Flow and Water Solutions segments experienced declines [1][2] - The overall revenue growth guidance for the year has been reduced from 2-3% to a range of flat to a 1% decline due to high interest rates affecting sales [2] - The company has successfully de-levered its balance sheet from ~2.6x to 1.6x, positioning itself for potential bolt-on M&As [3] Revenue Analysis and Outlook - In Q2 2024, consolidated sales increased by 1.6% Y/Y to $1.099 billion, with organic growth of 2.2% [1][23] - The Pool segment's strong growth was attributed to easier Y/Y comparisons and pricing increases, while the Water Solutions segment faced a 7.6% Y/Y decline due to tough comparisons and high interest rates impacting demand [1][2] - The Flow segment saw a 3.6% Y/Y decline, primarily due to a 10% Y/Y drop in residential flow sales [1] Margin Analysis and Outlook - The company's adjusted operating margin expanded by 310 bps Y/Y to 24.7% in Q2 2024, benefiting from price increases and productivity gains [4][25] - Management anticipates continued pricing increases above inflation, which should support margin growth moving forward [10][13] Valuations and Conclusion - The company is currently trading at 17.97x FY 25 consensus EPS estimates of $4.79, in line with its 5-year average forward P/E of 17.80x [8] - There is potential for upward revisions in EPS estimates due to ongoing cost-saving initiatives, with a target of $100 million in cost reductions for the current year [10][29] - The company is expected to achieve double-digit EPS growth in the coming years, driven by revenue growth and margin expansion [22][29]