Oppenheimer Gives Color On Pentair Following Earnings Release

Pentair PNR shares surged 3% as 2011 margin commentar y for 100 bps+ of margin expansion appears increasingly confident. Incremental margins for 2010 were approximately 23%, but adjusted for about $50M of employee cost reinstatements were at the mid 30% level by Oppenheimer's calculation. For 2011, guidance for 100 bps+ of margin expansion requires 29%+ incremental margins. Residential growth has stagnated, indicating a more pronounced cyclical uptick required for this market now that the easiest comparisons have passed; however, execution across growth initiatives appears supportive of 4-5% water growth, even in the absence of meaningful residential recovery. EPS guidance remains $2.20-2.35, with 1Q of $0.42-0.45. 1Q11 should see about half realization of 1.5-2.0% price guidance. Oppenheimer is maintaining '11E EPS of $2.30 and '12E of $2.80, and raising PT to $41 from $39, based on 18x '11E EPS and 14.6x '12E EPS, roughly in line with historical multiples. Oppenheimer has a $41 PT and Perform rating on Pentair PNR closed Tuesday $37.28