Pall Corp (NYSE:PLL) has a corporate mission of "making the world safer, greener and better." Its key way of doing this is through the sale of filters and related devices that remove contaminants from life science materials and water and related liquids in the industrial sector. Its businesses have great potential, but the potential for above-average shareholder returns is currently uncertain.
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Second Quarter Recap
Sales advanced 8.2% to just a hair shy of $698 million. Pall breaks its operations into two divisions. The Life Sciences unit is the largest and grew 6.9% to $357.2 million, or 55.9% of second quarter sales. Pall sells technologies to help its clients research, discover, develop and produce drugs and related healthcare products. Specific products include blood filtration devices and hospital infection control systems at underlying clients that likely include Health Management Associates (NYSE:HMA) and HCA (NYSE:HCA) hospitals. The remaining $340.8 million stemmed from the Industrial segment that 9.6%. This business consists of helping industrial clients, including commercial aerospace firms such as Boeing (NYSE:BA) and industrial manufacturers such as General Electric (NYSE:GE) filter and process fluids.

Sales costs grew more slowly than sales, but operating SG&A expenses grew faster than the top line to result in operating income growth of 7.8% that slightly lagged sales growth. Operating profit came in at $123.5 million, or 17.7% of total sales for a very healthy operating profit margin. However, lower income tax expense helped send net income up 12% to $84.7 million. Share buybacks pushed per-share earnings up a bit further as earnings per diluted share increased 12.5% to 72 cents. Management estimated 76 cents in diluted earnings when looking at its recurring business. For related reading, see Zooming In On Net Operating Income.

For the full year, analysts' project total sales growth in excess of 6% and total sales of nearly $3 billion. They expect earnings of $3.17 per share for annual growth in the neighborhood of 19%.

The Bottom Line
Nearly half of Pall's business stems from the cyclical industrial market, but its sales held up well during the credit crisis and ensuing global recession. Its Life Science focus is certainly a strong point during economic downturns, and its overall product mix appears to be stable and exposed to a strong secular trend of water and energy management, environmental and regulatory requirements and continued advances in medicine.

At a forward P/E close to 17, many investors are already aware of Pall's appealing businesses and their global growth potential. Free cash flow multiples are even higher as annual capital expenditure needs take up a higher percent of annual operating cash flow. Overall, the company is worth monitoring closely, as is the stock for a potential pull back to more reasonable valuation levels.

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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