In this article, let's take a look at Memphis-based Pall Corporation (PLL, Financial), a $9.24 billion market cap company, which is a leading producer of filters for the health care, aerospace, microelectronics and other industries.
Upside potential
We believe the company has upside potential because it operates in a market that is beginning to pay more attention to pure water. Moreover, Pall has significant growth opportunities in the biopharmaceuticals segment with a growing rate that doubled those of traditional pharma products.
The company made great efforts to create effective components in filtration systems. Talking about efforts, the firm managed to lower operating costs.
In the health-care industry, the developed facilities lower the risk of diseases contracted while patients are hospitalized.
Filtration industry
The company has managed to get a good position in the filtration industry. Efforts have been made with customers to design systems to fit customers' specific needs.
We believe that in the future the firm will benefit from a predictable revenue stream for its filters. This is very good for keeping the competitive position while increasing the switching costs in order to make it difficult to switch platforms.
Management
Management is always seeking profitability improvements. For example, it's been improving the company's cost structure in emerging markets.
Further, the company will focus on strategic markets, such as Asia. It will expand its outsourcing network in other countries, with a low-cost strategy.
Revenues, margins and profitability
Looking at profitability, revenue growth by 11.59% led earnings per share increase in the most recent quarter compared to the samequarter a year ago ($1.08 vs $0.76). During the past fiscal year, the company increased its bottom line. It earned $3.26 versus $2.88 in the prior year. This year, Wall Street expects an improvement in earnings ($3.87 versus $3.26).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| PLL | Pall | 31.68 |
| CFX | Colfax Corp | 7.11 |
| SNA | Snap-on Inc | 16.58 |
| XYL | Xylem Inc | 10.17 |
| Â | Industry Median | 7.13 |
The company has a current ROE of 31.68% which is higher than the industry median and its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 28.7x, trading at a discount compared to an average of 24x for the industry. To use another metric, its price-to-book ratio of 5.1x indicates a premium versus the industry average of 1.81x, while price-to-sales of 3.5x is above the industry average of 1.05x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $30.571, which represents a 25% compound annual growth rate (CAGR).
Final comment
As outlined in the article, Pall has improved operating costs and management expects an improvement (100bp) in operating margin due to those better costs. Also, it has managed to remain close to customers.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Ron Baron (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
