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Investors in Pall Corporation (NYSE:PLL) hardly reacted to the news that the purification company made a small acquisition, boosting the LifeSciences activities of the business.

The deal will add little to Pall's operations, boosting annual revenues by merely a percent. After shares have seen solid returns, I would be cautious despite the attractive long-term prospects. The high valuation, combined with slow revenue growth makes me quite cautious and make me want to stay on the sidelines.

The Deal

Pall announced that it has entered into a definitive agreement to acquire the LifeSciences business of ATMI (NASDAQ:ATMI) for $185 million.

The acquired business is a technological leader in the field of single-use process systems and consumables for the pharmaceutical and biopharmaceutical industry.

CEO and Chairman Larry Kingsley commented on the rationale behind the purchase, "This acquisition immediately strengthens our offering and broadens our already extensive portfolio of advanced solutions for biopharmaceutical customers."

The acquisition is expected to add $20-$30 million in revenues for the fiscal year of 2014. The deal will be dilutive to annual earnings by five to eight cents per share. Following the deal, Pall sees pro forma earnings between $3.30 and $3.50 per share for 2014.

The deal is expected to close in the third quarter of Pall's fiscal year and is subject to normal closing conditions, including regulatory approval.


At the end of November, Pall released its first quarter results for the fiscal year of 2014. The company ended the quarter with $968.0 million in cash and equivalents. Total debt stands at $728.0 million, for a net cash position of $240 million.

Revenues for the first quarter of the new year came in at $629.8 million, up just 0.3% on the year before. Earnings from continuing operations fell by a fifth to $71.5 million.

Full year revenues for the past fiscal year came in at $2.65 billion, down 0.9% on the year before. The company posted big earnings of $575 million last year, on the back of the sale of business units. Earnings from continuing operations rose by 17.5% to $330 million.

Trading around $85 per share, the market values Pall at $9.4 billion. This values operating assets of the firm at $9.2 billion, or 3.5 times annual revenues and 27-28 times annual earnings.

Pall pays a quarterly dividend of $0.275 per share, for an annual dividend yield of 1.3%.

Some Historical Perspective

Long-term investors in Pall have seen decent returns. From highs of $50 in 2007, shares fell to lows of $20 in 2009. Ever since, shares have seen a very decent recovery, trading with gains of 40% so far this year. Shares are currently trading at all-time highs of $85 per share.

Between the fiscal year of 2010 and 2013, Pall has increased its annual revenues by a cumulative 21% to $2.65 billion. Earnings from continuing operations rose by roughly two-thirds to $330 million.

Investment Thesis

Pall has positioned itself as a strong player in the business of filtration, separation and purification of fluids, among others. The strong presence and global reach have given the company allure, as the company has steadily boosted margins in recent years.

While this has fueled earnings growth, I am not convinced with the modest pace of revenue growth for a company operating in this "megatrend" for growth. The company essentially has 50/50 operations in the LifeSciences and Industrial businesses and sees low to mid single-digit revenue growth for the fiscal year of 2014. As earnings are seen up another full 100 basis points, non-GAAP earnings should increase by 9 to 15% towards $3.30 and $3.50 per share.

As the company is approaching operating margins of 19% this year, Pall boosted margins significantly from those reported around 15% just three years ago. To further boost earnings growth, share repurchases help. Yet the $250 million buyback program for 2014 allows the company to repurchase a mere 2.7% of its current float outstanding.

Crucial will be to grow revenues, as the company is still facing currency headwinds. The reported deal will add little to the company in the short term, however. ATMI's life science business is expected to add roughly 1% in annual revenues, while the business will cost about 2% of Pall's market capitalization to acquire.

At 25 times non-GAAP earnings going forward, there are enough reasons to be cautious despite the appealing long-term growth trends. The rather modest revenue growth and declining opportunities for leveraging those sales are my key reasons to be cautious.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Pall: All-Time Highs For This 'Pure' Player