Earnings Analysis For Pall Corp.: Sustainable Returns Relative To Peers

| About: Pall Corporation (PLL)
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Pall Corp. (NYSE:PLL) reports preliminary financial results for the year ended 2012-07-31.

Pall Corp. (PLL-US) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. CapitalCube's analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Pall Corp.'s analysis versus peers uses the following peer-set: Terumo Corp.(OTCPK:TRUMF), Mettler-Toledo International Inc. (NYSE:MTD), Qiagen N.V. (NASDAQ:QGEN), PerkinElmer Inc. (NYSE:PKI), Bio-Rad Laboratories Inc. Cl A (NYSE:BIO), Cepheid (NASDAQ:CPHD), Bruker Corp. (NASDAQ:BRKR), FEI Co. (NASDAQ:FEIC), Hermes Microvision Inc. (OTCPK:HESAF) and Tecan Group AG (OTC:TCHBF). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-07-31 2011-07-31 2010-07-31 2009-07-31 2008-07-31
Revenues 2,671.7 2,740.9 2,401.9 2,329.2 2,571.6
Revenue Growth % (2.5) 14.1 3.1 (9.4) 14.3
Net Income 280.9 315.5 241.2 195.6 217.3
Net Income Growth % (11.0) 30.8 23.3 (10.0) 70.4
Net Margin % 10.5 11.5 10.0 8.4 8.4
ROE % 18.7 23.6 21.0 17.4 19.8
ROA % 8.5 10.1 8.3 6.7 7.7

Valuation Drivers

Pall Corp. currently trades at a higher Price/Book ratio (4.5) than its peer median (3.1). PLL-US's operating performance is higher than the median of its chosen peers (ROE of 20.1% compared to the peer median ROE of 13.3%) but the market does not seem to expect higher growth relative to peers (PE of 22.8 compared to peer median of 23.4) but simply to maintain its relatively high rates of return.

The company attempts to achieve high profit margins (currently 10.8% vs. peer median of 8.9%) through differentiated products. It currently operates with peer median asset turns of 0.8x. PLL-US's net margin has declined 0.7 percentage points from last year's high but remains above its five-year average net margin of 8.8.

Economic Moat

Changes in the company's annual top line and earnings (-2.5% and -11.0% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

PLL-US's return on assets is above its peer median both in the current period (9.1% vs. peer median 5.9%) and also over the past five years (8.3% vs. peer median 5.7%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's gross margin of 54.1% is around peer median suggesting that PLL-US's operations do not benefit from any differentiating pricing advantage. In addition, PLL-US's pre-tax margin of 14.2% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth & Investment Strategy

While PLL-US's revenues growth has been below the peer median in the last few years (4.7% vs. 8.5% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 22.8. The market seems to see the company as a long-term strategic bet.

PLL-US's annualized rate of change in capital of 6.4% over the past three years is less than its peer median of 11.4%. This investment has generated a better than peer median return on capital of 13.5% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.

Earnings Quality

PLL-US has reported relatively strong net income margin for the last twelve months (10.8% vs. peer median of 8.9%). This margin performance combined with relatively high accruals (6.3% vs. peer median of 3.5%) suggests possible conservative accounting and an understatement of its reported net income.

PLL-US's accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile
Pall Corp. supplies filtration, separation and purification technologies, principally made by the company using its engineering capability and fluid management expertise, proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases. The company operates its business through two businesses: Life Sciences and Industrial. The Life Sciences business group is focused on developing, manufacturing and selling products to customers in the Medical, BioPharmaceuticals and Food & Beverage markets. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Energy & Water, Aeropower and Microelectronics markets. It was founded on July 31, 1946 and is headquartered in Port Washington, NY.

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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. I have no business relationship with any company whose stock is mentioned in this article.