• If you are wondering whether Pentair at around US$74.58 is offering genuine value or just looks cheap on the surface, it helps to line up the recent share performance against what the fundamentals say.
• The stock is up 4.7% over the past week, although it is down 2.9% over the past month, down 29.3% year to date and down 24.6% over the past year, which may have changed how investors view both its potential and its risks.
• Recent attention around the stock has focused on how the business is positioned within the wider capital goods sector and the implications of that positioning for long term demand and cash flows. At the same time, investors have been weighing this against broader market sentiment and sector specific headlines. This helps explain the mix of short term strength and longer term weakness in the share price.
• Against that backdrop, Pentair currently scores a 6 out of 6 valuation score. The next sections will walk through what different valuation methods suggest about the stock, before finishing with a way to tie those numbers to the bigger picture of how the market may value the company over time.

Approach 1: Pentair Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model projects a company’s future cash flows and then discounts them back to today’s value to estimate what the business might be worth right now.

For Pentair, the latest twelve month free cash flow is about $711.2 million. Analysts and Simply Wall St’s 2 Stage Free Cash Flow to Equity model project free cash flow rising to $1,056.7 million by 2029, with further estimates out to 2035 based on a structured extrapolation of those analyst forecasts.

Bringing these projected cash flows back to today using an appropriate discount rate gives an estimated intrinsic value of about $99.73 per share. Against a recent share price around $74.58, the model implies the stock is about 25.2% undervalued on this cash flow view.

This model is only one lens, but on its own numbers Pentair’s current price sits at a clear discount to the DCF estimate of value.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Pentair is undervalued by 25.2%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Approach 2: Pentair Price vs Earnings

For profitable companies, the P/E ratio is a useful gauge because it links what you pay for the stock to the earnings the business is already generating. It also tends to reflect what the market is willing to pay for each dollar of profit, given expectations and perceived risk.

Higher growth expectations and lower perceived risk often justify a higher P/E, while slower expected growth or higher risk usually line up with a lower multiple being seen as “normal” for a stock. That is why context matters when you look at any single P/E figure.

Pentair currently trades on a P/E of about 18.4x, compared with an average of 27.1x for the wider Machinery industry and 30.3x across peers. Simply Wall St’s Fair Ratio for Pentair is 25.1x, which is its proprietary estimate of what the P/E might be given factors such as earnings growth, industry, profit margins, market cap and risks.

Because the Fair Ratio builds in those company specific drivers, it can give a more tailored view than a simple comparison with industry or peer averages. With Pentair’s current 18.4x P/E sitting below the 25.1x Fair Ratio, this framework points to the stock trading at a discount on an earnings multiple basis.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Pentair Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives are introduced here as your chance to attach a clear story to the numbers by setting your own view on Pentair’s future revenue, earnings and margins, then linking that story to a forecast and a Fair Value on Simply Wall St’s Community page. You can then compare that Fair Value with the current price to decide whether the stock looks attractive or stretched. Each Narrative updates automatically as fresh news or results arrive, and there is room for very different viewpoints. For example, one investor might lean toward a higher Fair Value around US$130.00 based on stronger growth and profitability assumptions, while another might anchor closer to US$90.91 with more cautious expectations.

Do you think there's more to the story for Pentair? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.