Pall Corporation (PLL, Financial) is a supplier of filtration, separation and purification technologies, principally made by the company, for the removal of solid, liquid and gaseous contaminants from a range of liquids and gases. The company serves customers through two businesses globally: Life Sciences and Industrial. While Pall competes with many companies in the Life Sciences markets and Industrial, few companies operate in both, like ESCO Technologies Inc. (ESE, Financial) and Danaher Corp. (DHR, Financial).
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.
Cost Reduction
Pall targeted $100 million in structural cost reductions over the next three years. It saved $50 million during fiscal 2013 by reducing SG&A expenses along with other costs. It expects to save another $50 million in the next couple of years. Further, we think new management is going to focus on improving the company's cost structure in emerging markets as well. Moreover, Pall will focus on markets such as Asia, expanding its outsourcing network in low-cost countries.
Research and Development (R&D)
Pall needs to continue to increase its speed and capacity for conducting research, generating new knowledge, and converting that into new products and processes. As a matter of fact, the company has made investments into research projects, game-changing technologies in areas like electronics and biotechnology. In 2013, the company spent $94 million on research and development expenses. With 160 invention disclosures and 27 applications for original patents, Pall seems to be in the right way. The segment that will benefit from R&D is the biopharmaceutical business, because it is expected to grow significantly due to rising demand as well as the increasing number of drugs and vaccines getting approved over time.
Analyst Recommendation
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a better Zacks Rank, Sharps Compliance Corp. (SMED, Financial) is the option.
P/E, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 31.6x, trading at a premium compared to the average of the industry. To use another metrics, its price-to-book ratio of 5.5x and the price-to-sales ratio of 3.72x are above their industry averages. All these metrics indicate that the stock is relatively overvalued relative to its peers.
Earnings per share (EPS) increased by 7.1% in the most recent quarter compared to the same quarter a year ago, to $0.75 per share for the second quarter of 2014. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an interesting upward trend over the last ten years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| PLL | Pall Corporation | 31.68 |
| SMED | Sharps Compliance Corp | -12.87 |
| CWST | Casella Waste Systems, Inc. | -479.77 |
| DCI | Donaldson Company, Inc. | 22.8 |
| GSEH | GSE Holding Inc. | 1.06 |
As we can see, the firm has a higher ROE than it peers: Sharps Compliance, Casella Waste Systems, Inc. (CWST, Financial), Donaldson Company, Inc. (DCI, Financial) and GSE Holding Inc. (GSEH, Financial).
Final Comment
The firm´s revenues rose trails the industry average of 1%. This growth seems to boost the EPS as we have seen. Moreover, net income increased by 9% when compared to the same quarter one year prior, rising from 76.77 million to $83.67 million.
The market’s long-term growth can only be secured through strong R&D activities and access to advanced technologies in the biotech industry. Also, the recent acquisition of ATMI LifeSciences business is a strategic move as it complements the Life Sciences segment business.
I would recommend investors to add Pall to their long term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Paul Tudor Jones (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) have taken long positions in it.
Disclosure: James Miller holds no position in any stocks mentioned.
