Best stocks to invest in – Pentair (PNR) to Report Q3 Earnings: What’s in Store?

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Pentair plc PNR, a diversified industrial manufacturing company that provides products, services and solutions for water and other fluids, thermal management and equipment protection, is slated to report third-quarter 2015 results on Oct 20, before the opening bell. Over the last 4 quarters, the company has managed to beat the Zacks Consensus Estimate on all occasions, delivering an average positive earnings surprise of 2.34%. Let’s see how things are shaping up for this announcement.

Factors Influencing This Quarter

Pentair expects third-quarter 2015 adjusted earnings per share in the range of 94 cents to 97 cents, down approximately 3% to 6% year over year on an adjusted basis. The company expects third-quarter revenue to be approximately $1.6 billion, down around 8% to 9% on a reported basis and 2% to 3% on a core basis from third-quarter 2014.

In the Valve & Control segment, core orders declined 12%. The company does not expect orders to improve during 2015 owing to the global economic uncertainty and as customers continue to reevaluate existing projects in their pipelines of planned projects. The company expects sales in Valves & Controls segment to be down approximately 11% to 12%.

Growth in the second largest vertical, Residential/commercial, which accounts for 27% of Pentair’s sales, remains healthy driven by continued strength in the North American residential replacement market and the ongoing commercial construction recovery. The Food & Beverage segment that accounts for 10% of Pentair’s sales is projected to grow mainly driven by strength in beverage and food services markets, further share gains and customer penetration.

On the flip side, Pentair expects most of its energy-related businesses to remain challenged given the slump in oil prices. Oil & gas trends (approximately 19% of sales) remain volatile, particularly in upstream applications where management sees continued project delays and incremental pressure from declining oil prices.

Moreover, power (5% of sales) and mining (3% of sales), demand trends remain weak. The Industrial vertical (representing roughly 29% of sales) will continue to be affected by slowdown in global capital spending.

Even though the acquisition of ERICO Global Company, for $1.8 billion in cash, will expand Pentair’s presence in the commercial and industrial sectors and will likely be accretive to its 2016 earnings, the deal will exert pressure on the company’s balance sheet. Since the second quarter, the company has priced senior notes to fund the buyout. This will increase its interest burden. In addition, a stronger U.S. dollar will also negatively impact its results.

Earnings Whispers

Our proven model shows that Pentair is not likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: Pentair’s Earnings ESP is currently -2.08%. This is because the Most Accurate Estimate of 94 cents is lower than the Zacks Consensus Estimate of 96 cents.

Zacks Rank: Pentair’s Zacks Rank #2 when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Sharps Compliance Corp. SMED, with an Earnings ESP of +25.00% has a Zacks Rank #1.

HD Supply Holdings, Inc. HDS with an Earnings ESP of +4.55% and a Zacks Rank #2.

Ball Corp. BLL, with an Earnings ESP of +2.11% carries a Zacks Rank #3.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PENTAIR PLC (PNR): Free Stock Analysis Report
BALL CORP (BLL): Free Stock Analysis Report
HD SUPPLY HLDGS (HDS): Free Stock Analysis Report
SHARPS COMPLIAN (SMED): Free Stock Analysis Report
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