According to a Form 4 filed with the SEC, Pall Corporation (NYSE:PLL) Board member Craig Owens directly purchased close to 3,000 shares of the company’s stock on March 4th at an average price of about $67.82 per share. He now owns almost 5,000 shares of the stock, meaning that this purchase more than doubled his stake in the company. Pall is a $7.6 billion market cap manufacturer of laboratory and industrial equipment. In addition to our work on hedge fund investing strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the market by an annual average of 18 percentage points), we track insider trading activity because studies show that stocks bought by insiders have a small outperformance effect on average (learn more about studies on insider trading). We think that this is because buying the stock violates the principles of diversification and so that insiders should tend to choose to do so when the company has good prospects.
The second quarter of Pall’s fiscal year ended in January, with the company experiencing a 4% increase in revenue compared to the same period in the previous fiscal year. Because of a loss from discontinued operations (earnings from continuing operations, conversely, were up 8%), net income declined from its levels a year earlier. So we would say that the results look mixed to slightly positive since Pall Corporation is improving its net income from current operations.
At the current market capitalization Pall Corporation trades at 14 times trailing earnings, though this seems to include an abnormal gain from discontinued operations in the first quarter of the current fiscal year. Analyst expectations are for $3.56 in EPS for the fiscal year ending in July 2014, which makes for a forward P/E of 19. That pricing seems a bit high for a company with such modest growth rates.
Robert Caruso’s Select Equity Group increased its holdings of Pall by 17% between October and December, and had 2.7 million shares in its portfolio at the end of 2012 (see Caruso’s stock picks). Renaissance Technologies, whose founder Jim Simons is now a billionaire, also bought shares and closed the fourth quarter of last year with a position of about 610,000 shares (find Renaissance’s favorite stocks). However, hedge fund interest in the company was not very broad: only these two funds and Columbus Circle Investors had over $10 million invested in the stock.
How does the company compare to its peers?
We would compare Pall to companies such as Sensata Technologies Holding N.V. (NYSE:ST), Bio-Rad Laboratories, Inc. (NYSE:BIO), Bruker Corporation (NASDAQ:BRKR), and FEI Company (NASDAQ:FEIC). All four of these companies’ stocks trade at more than 20 times trailing earnings, though in terms of forward estimates they actually all trade at a discount to Pall (though in some cases the gap is very narrow). Now, this is generally because they are expected to see a rapid increase in earnings which may not pan out- for example, the respective trailing and forward P/Es for Sensata are 33 and 13. In addition, in many cases these peers have not been performing well recently- Bio-Rad and Bruker actually reported a decline in net income (and only a moderate increase in revenue) in the fourth quarter of 2012 versus a year earlier. FEI’s earnings growth was only 3% over the same period.
As a result we’d conclude that many similar companies are trading at rather high levels based on optimism concerning the next couple years- regardless of the fact that recent quarterly reports have not been particularly rosy. Pall does not look like a value in absolute terms from our analysis of the company, but it at least has been growing its business (in terms of earnings from continued operations) and might be preferable to owning stocks such as Bio-Rad, Bruker, and FEI.
Disclosure: I own no shares of any stocks mentioned in this article.
