• Investors may be wondering whether Pentair at around US$72.68 is starting to look like value, or if the recent weakness is a warning sign.
• The stock is down 5.4% over the past week, 20.2% over the past month and 31.1% year to date, with a 27.4% decline over the last year, even though the 3 year and 5 year returns sit at 27.1% and 14.0% respectively.
• Recent market attention has centered on Pentair as investors reassess capital goods stocks. Sector sentiment and macro headlines are both influencing risk appetite, which helps explain why a stock that has positive multi year returns can still see shorter term weakness.
• Pentair currently holds a valuation score of 6/6. The rest of this article will walk through the standard valuation tools behind that score before closing with a different way to think about what fair value really means.

Approach 1: Pentair Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a stock could be worth by projecting the company’s future cash flows and discounting them back to today’s value. For Pentair, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections in $.

Pentair’s latest twelve month free cash flow is about $711.2 million. Analyst and extrapolated projections from Simply Wall St point to free cash flow figures between $835.9 million and $1,315.5 million over the next decade, with those later year numbers reflecting modelled estimates rather than explicit analyst forecasts.

When all projected cash flows are discounted back to today, the DCF model arrives at an estimated intrinsic value of about $97.06 per share. Compared with the current share price of roughly $72.68, this difference of about 25.1% indicates that, on this method, Pentair appears to be trading below the model’s estimated intrinsic value.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Pentair is undervalued by 25.1%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Approach 2: Pentair Price vs Earnings

For profitable companies, the P/E ratio is often a useful guide because it links what you pay for each share to the earnings that the business is already generating. It gives a quick sense of how many years of current earnings the market is pricing into the stock.

What counts as a “normal” P/E depends on how fast earnings are expected to grow and how risky those earnings are. Higher expected growth and lower perceived risk tend to support a higher P/E, while lower growth or higher uncertainty usually point to a lower one.

Pentair currently trades on a P/E of 17.9x, compared with about 25.9x for the Machinery industry and roughly 26.9x for peers. Simply Wall St’s Fair Ratio for Pentair is 26.1x. This Fair Ratio is a proprietary estimate of the P/E that would be expected for the stock, given factors such as earnings growth characteristics, industry, profit margins, market cap and risk profile. Because it is tailored to the company, it can be more informative than a simple comparison with broad industry or peer averages.

Since Pentair’s current P/E of 17.9x sits below the Fair Ratio of 26.1x, the stock appears undervalued on this measure.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Start investing in legacies, not executives. Discover our 19 top founder-led companies.

Upgrade Your Decision Making: Choose your Pentair Narrative

Earlier it was mentioned that there is an even better way to understand valuation, so meet Narratives, where you set out your story for Pentair by linking your assumptions about future revenue, earnings and margins to a Fair Value, then compare that Fair Value with the current price to help decide whether the stock looks attractive or expensive, all within Simply Wall St’s Community page where Narratives update as new news or earnings land and where different investors can sit anywhere between a more optimistic view closer to a US$130.0 fair value or a more cautious stance around US$90.91, based on what each believes is most realistic for the business.

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.