Here is the best unknown stock to buy right now with $1,000

There are plenty of stocks to buy with upside exposure to falling interest rates, and there’s also no shortage of stocks whose management is restructuring the company for revenue and margin expansion. However, what about buying shares in a company whose restructuring initiatives make it look like good value and benefit from a lower interest rate environment?

This is the proposition of the water solutions company Pentair (PNR -0.86%)It is the kind of stock that novice investors should consider adding to their portfolios, as it is a relatively low-risk stock with good upside potential.

Pentair’s growth path

Management’s so-called transformation and 80/20 initiatives call for improving return on sales (operating profit margin) from 20.8% in 2023 to 24% in 2026. It’s an ambitious goal, but so far, Pentair has the numbers to back it up. . Indeed, it’s particularly compelling that the company’s initiatives are already showing margin expansion, even as its sales outlook has worsened this year.

The latter was evident in the updated full-year guidance on the second quarter earnings call. Management lowered its full-year sales growth expectations due to the deterioration in the consumer discretionary market related to the real estate market, namely its pool products. However, its restructuring initiatives are paying off, with improved margin and earnings expectations outlined below.

Data source: Pentair presentations.

How Pentair makes money

The importance of Pentair’s swimming pool segment is demonstrated below by looking at second-quarter sales and earnings, as well as management’s growth plans outlined in its March investor day presentation. Not only is the pool segment the highest margin segment, but it is the one where management expects the highest growth over the medium term.

Data source: Pentair presentations.

A weak housing market

It’s no secret that the housing market has been weaker than expected in 2024. This is primarily due to interest rates remaining relatively high longer than anticipated. Indeed, distributor of swimming pool products Pool Corp (Pentair is the largest supplier, responsible for 19% of the cost of its products in 2023) has already told investors that it expects new pool construction activity to decline by 15% to 20% in 2024, remodeling activity decreasing by up to 15%.

Pentair management sounded a similar note of caution in its second-quarter earnings presentation in July, with CEO John Stauch noting that “New indoor pool builds in 2024 are now expected to approach the 60,000 pool range, compared to about 72,000 in 2023 and about 78,000 in 2019”.

However, it is important to note that the installed base of swimming pools is still growing. As such, this will support relatively sticky maintenance costs in the future. Meanwhile, with a lower interest rate environment ahead, spending on inground pools (Pool Corp estimates that they account for up to 18% of pool industry spending) will begin to rise again.

Image source: Getty Images.

Transformation and 80/20 initiatives

We have discussed initiatives in more detail previously. These comprise a number of pricing initiatives involving “value-based pricing”, where management optimizes product prices rather than implementing large-scale price increases. Its sourcing initiatives aim to simplify the supply chain and improve supplier relationships, thereby increasing Pentair’s supplier revenues.

Steve Pilla, Chief Transformation and Chief Supply Chain Officer, outlined operational excellence initiatives at the investor day when he noted, “As we look at the number of plants, 41 located around the world, 15 of those plants represent about 75% from our income. Furthermore, management plans to implement lean manufacturing techniques and invest in automation to reduce costs.

Finally, its 80/20 initiative focuses on 80% of its revenue generated by 20% of its customers. The initiative should result in a much more streamlined company focused on maximizing the value of the most profitable products for the best customers. Meanwhile, supply chain and operational initiatives should reduce costs.

Rating matters

Wall Street is aware of management’s plans, and the table below shows the analyst consensus for free cash flow (FCF) generation over the next few years.

Data source: marketscreener.com

The current market cap is $14 billion, implying a price-to-FCF valuation of less than 20x in 2024, falling to 15.7x in 2026 when the initiatives are completed. That’s very attractive, and if there’s potential upside from a relatively lower interest rate environment, those estimates could turn out to be conservative.

It all adds up to make Pentair a great stock for investors looking to test the waters of the markets.