Here's the Best Unknown Value Stock to Buy Right Now With $1,000

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

That's the proposition at the water solutions company Pentair (NYSE: PNR). It's the sort of stock newbie investors should consider adding to their portfolios, because it's 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 its return on sales (operating profit margin) from 20.8% in 2023 to 24% in 2026. It's an ambitious aim, but so far, Pentair has the numbers to back it up. Indeed, it's particularly compelling that the company's initiatives are already demonstrating margin expansion, even as its sales outlook worsened this year.

The latter was apparent in the updated full-year guidance on the second-quarter earnings call. Management cut its full-year sales growth expectations due to deterioration in the consumer discretionary market related to the housing market, namely its pool products. Nevertheless, its restructuring initiatives are bearing fruit, with upgraded margin and earnings expectations shown below.

Data source: Pentair presentations.

How Pentair makes money

The importance of Pentair's pool segment is demonstrated below by looking at sales and income from the second quarter, and at management's growth plans outlined in its investor day presentation in March. Not only is the pool segment its highest-margin segment, but it's the one management expects the most growth out of 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 staying relatively high for longer than anticipated. Indeed, pool products distributor Pool Corp (Pentair is its largest supplier, responsible for 19% of its cost of products in 2023) has already told investors it expects new pool construction activity to decline by 15% to 20% in 2024, with remodeling activity declining by as much as 15%.

Pentair's management sounded a similar note of caution in its second-quarter earnings presentation in July, with CEO John Stauch noting that "New in-ground pools built in 2024 are now expected to be near the 60,000 pool range compared to roughly 72,000 in 2023 and roughly 78,000 in 2019."

Still, it's important to note that the installed base of swimming pools is still growing. As such, that will support relatively sticky maintenance spending in the future. Meanwhile, given a lower-interest-rate environment in the future, spending on in-ground pools (Pool Corp estimates it accounts for up to 18% of spending in the pool industry) will start growing again.

Image source: Getty Images.

Transformation and 80/20 initiatives

I've discussed the initiatives in more detail previously . They encompass a range of pricing initiatives involving "value-based pricing," where management optimizes product pricing rather than applying broad-based pricing increases. Its sourcing initiatives aim to simplify the supply chain and enhance supplier relationships, thereby increasing suppliers' revenue from Pentair.

Chief Transformation and Chief Supply Chain Officer Steve Pilla laid out operational excellence initiatives on the investor day when he noted: "As we look at the number of factories, 41 located around the world, 15 of those factories represent about 75% of our revenue." Moreover, management plans to implement lean manufacturing techniques and invest in automation to cut costs.

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

Valuation matters

Wall Street is aware of management's plans, and the table below shows the analyst consensus for generating free cash flow (FCF) 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 20 times in 2024, dropping to 15.7 times in 2026 when the initiatives are complete. That's highly attractive, and if there's some potential upside from a relatively lower-interest-rate environment, those estimates might prove conservative.

It all adds up to make Pentair an excellent stock for investors looking to test the waters in the markets.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .