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Summary

  • Pall reported strong results for the fourth quarter, aided by acquisitions.
  • Despite recent acquisitions, the balance sheet remains very healthy leaving sufficient flexibility to do more deals going forward.
  • Shares are valued too high in my opinion. I like the prospects for the business on significant dips.

Pall (NYSE:PLL), the life science and industrial conglomerate, posted its fourth-quarter results last week, pleasing its investors which sent shares higher on the back of the release.

The company is continuing to report solid organic growth, with topline sales growth being aided by acquisitions. Dividends and modest share repurchases add to the appeal of the business for investors.

While the business is world-class, the valuation is too rich in my opinion. As such, I am only a cautious buyer on significant dips.

Solid End To The Year

Pall posted fourth-quarter sales of $800.0 million, an 11.6% improvement compared to the year before.

The business continues to be very profitable, as a matter of fact profit growth outpaced sales growth again. Pall posted net earnings of $120.1 million, a 40.2% increase compared to the year before.

Thanks to modest share repurchases of about 2% of the outstanding share base over the past year, earnings per share saw an additional boost. GAAP earnings per share rose by 44% to $1.08 per share.

On a pro-forma basis, earnings rose by 23.3% to $1.11 per share, thereby beating consensus estimates by five cents.

Growth Driven By Life Sciences

Reported growth was driven by the life sciences business with sales being up by 16.7% to $413 million, thanks to its biopharmaceuticals business in particular. Growth in this segment has been aided by acquisitions, as currency movements from the weaker Euro in particular aided reported revenue growth by three percentage points.

Sales of the industrial business rose by 6.6% to $387 million, as very weak system sales have been offset by a strong performance at the process technologies business, aerospace and microelectronics unit.

Overall, the company posted 10% growth in revenues. It must be noted that roughly half of this growth was the result of acquisitions which the company has made over the past year.

Overall, gross margins fell by some 50 basis points to still a very comfortable 51.0% of sales. Margins pressure was mainly caused by the life science business, while industrial margins were rather constant.

The company did show real operating growth with total operating expenses being down by 130 basis points to 27.8% of sales, allowing operating profits to improve by a full percent point to nearly 20%.

Net earnings growth has furthermore been aided by much lower restructuring costs which fell to $10.2 million. At the same time, the effective tax rate dropped by 4.4% to 17.9% of operating income, only adding to net earnings.

Valuation

Pall ended the year with $964 million in cash, while it holds some $889 million in debt on its balance sheet, resulting in a modest net cash position of about $75 million.

With 111 million shares outstanding at the end of the quarter on a diluted basis, equity in the business is valued at $9.3 billion with shares trading at $84 per share.

This values the business at 3.3 times annual revenues and 25 times annual earnings as reported for the past year.

History Of Steady Growth

Pall has demonstrated steady growth over the past decade, although sales have been flattish in recent years. Between 2004 and the current moment, the company has grown its sales by nearly 60% on a cumulative basis. This translates into an average growth of 4-5% of sales over this time period.

Over the past three years, sales have been rather stagnant. That being said, Pall is showing real growth again, although it must be said that this growth is being aided by acquisitions. Despite the sluggish sales growth in recent times, Pall has managed to significantly expand its margins over the past decade, now being able to post sustainable earnings of $400 million per annum.

The company has retired about 25-30% of its shares over the past decade, only adding to the reported achievements on a per share basis. Important to notice as well, Pall has managed to turn a modest net debt position into a small net cash position giving it continued financial flexibility going forward.

Further Growth Anticipated

For the upcoming fiscal year of 2015, Pall foresees revenues growth in the mid-to-high single digits. The company anticipates that acquisitions will add to reported growth, as organic growth is seen in the low-to-mid single digits.

Growth is anticipated to be complemented with margin expansion. Gross margins are seen stable, or they could perhaps increase by some 20 basis points. Yet real gains are anticipated through lower operating costs which are seen down by a full percent.

Anticipated revenue growth and margin expansion should result in 9-15% growth in adjusted earnings to $3.75 to $3.95 per share.

Final Takeaway

Investors like Pall for the predictability of the business which results from the focus on technology and the strong market position in niche markets.

This results in overall stable reported revenue growth and high margins. Pall has rewarded investors by repurchasing shares as well on top of steady dividend hikes, with the current yield coming in at 1.3%.

While the very strong track record, anticipated growth and a solid balance sheet are appealing, the valuation is already quite elevated. Shares now trade at about 22 times anticipated earnings for the upcoming year, quite a premium compared to the overall market.

This combined with the very strong momentum, with shares quadrupling from $20 in 2009 to $84 at the moment, makes me quite cautious. At the start of June, I last checked out the prospects for the company. I have to reiterate my opinion which I formed at the time. I like the underlying business, yet the valuation is simply too high despite the high-quality business and anticipated growth in the coming years.

At 19-20 times forward earnings, which translates into a $75 entry target, I might be inclined to pick up some shares to slowly built up a position.

Source: Pall - Great Business, But No Appeal At The Current Moment