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Summary

  • Pall reported a solid set of third-quarter results.
  • Life Science business drives results, as order intake grows at double-digit numbers.
  • Valuation already reflects a great deal of good news, a bit too much in my opinion.

Pall Corporation (NYSE:PLL) announced a solid set of third-quarter earnings over the past week which were largely in line with expectations.

Investors were perhaps hoping for even better news as shares saw a very modest correction towards the end of the week. While the company is doing great, the market has attached a price tag to the company which is too rich for me.

Third-Quarter Results

Pall reported third-quarter revenues of $682.4 million which was up 6% compared to the previous year.

Reported net earnings rose by 21.4% towards $88.7 million. As a result of modest share repurchases, earnings per share rose by 23.1% to $0.80 per share.

Looking Into The Operations

Pall reported solid sales growth with sales increasing by 7% in constant currency terms. Growth in top-line revenues is foreseen for the coming quarters as well as order growth came in at 10%. This marks the second consecutive quarter of double-digit growth for the order book.

Life science sales rose by 13% to $369 million, notably driven by strength in the BioPharmaceuticals segment which has been driven by acquisitions. Gross margins within the segment fell by 260 basis points to 54.9% of sales. The impact on operating profits was limited to 90 basis points with operating margins totaling 24% of sales.

Industrial revenues fell by nearly a percent to $313 million as weakness in aerospace and process technologies was offset by a strong performance of the microelectronics business. The unit benefited from customer wins and a strong market. Gross margins fell by 10 basis points to 46.4% of sales while operating margins were up by 110 basis points to 15.7% of sales.

A Quick Update For The Rest Of The Year

CEO Larry Kingsley reconfirmed that Pall remains on track to deliver mid-single digit top line growth and pro-forma earnings of $3.35 to $3.45 per share.

Valuation

Pall ended the quarter with $870.9 million in cash and equivalents. Total debt stood at $769.0 million which results in a modest net cash position of little over a hundred million.

Trading at $85 per share, Pall is valued at $9.3 billion which values operating assets at around $9.2 billion.

Revenues for the first three quarters of the year came in at $1.99 billion, up 3% compared to the year before. Net earnings came in at nearly $244 million down from a non-comparable earnings reported the year before.

At this pace full-year revenues are seen at $2.7-$2.8 billion while pro-forma earnings are seen around $375 million. This values operating assets of the firm at 3.3 times annual revenues and 24-25 times annual earnings.

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

Pall's Increasing Reliance Upon Life Science

Pall is basically a big conglomerate with two major markets being the industrial as well as the life science market.

The latter is actually growing at double-digit rates, aided by strong tailwinds while the industrial segment is struggling at the moment. Within life sciences, Pall facilitates drug discovery, development, validation as well as production. It furthermore provides various other technologies, filtration as well as purification technologies, among many other services.

Within the industrial business, Pall focuses on technologies for the energy, chemical and water sector, among others. It also offers filtration and fluid monitoring equipment.

Implications For Investors

The enormous diversification within both divisions is beneficial in that it creates much more predictable results, while of course the industrial activities remain quite cyclical.

Over the past years, the company has steadily grown its business at single digit rates with exception of the very difficult 2009. The company has consistently been profitable and managed to boost operating margins. Combined with a modest pace of share repurchases, investors saw an even greater jump in earnings per share.

The market has clearly rewarded the company for the performance. Shares traded at $40 ahead of the financial crisis to fall to lows of $20 amidst the recession. Ever since shares have more than fourfolded, trading as high as $90 in recent months.

At these and current levels, shares have already reflected all the good news and even some more. Shares might be appealing on large dips, however I would not pick up any shares at current levels.

Source: Pall Corporation - Steady As She Goes, Valuation Already Reflects The Good News