I’ve long been unwilling to pay up for popular “theme” stocks, and with the correction in valuations for industrial “compounders” and water stocks, I don’t feel so bad about passing on the group six months ago. The performance of Pentair (PNR) hasn’t been the worst in the group since my last update on the company, but a greater than 20% drop is still painful underperformance all the same.
Not unlike in the HVAC space, there are worries now around how Pentair will handle increasingly difficult comps in its core residential pool business, to say nothing of the question of how much demand was pulled forward during the pandemic lockdowns (when a lot of people redirected spending to renovating and improving their homes). I do believe that water treatment offers some upside and I think the industrial filtration business is better than commonly appreciated, but I do think Pentair faces a tough one-two combination of slowing revenue momentum and weaker margins on cost pressures.
Like many other former darlings, I’m conflicted about Pentair today. I do have concerns about “lower for longer” revenue performance, but this is also a company with growth drivers outside of pools and a return on tangible assets that is well above average (one of the highest among multi-industrials). While I do worry that sentiment could limit near-term outperformance, a long-term annualized total potential in the high single-digits for a well-run company is hard to ignore.
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Pentair Punished As Investors Shift Away From Expensive Water-Theme Stocks
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