We all need clean air, water and food to survive. But maintaining the safety of these life-giving resources is becoming more difficult as the global population swells. The result is increased demand for specialized filtration and purification systems. While there are many players in the business, this one is head and shoulders above the competition.–The Editors

A Cleaner World

A manufacturer of separation, filtration and purification technologies, Pall Corp (NYSE: PLL) is a leading supplier of filtration systems and consumable filters to a variety of industries. Its Life Sciences division services biotech outfits and food and beverage producers, while its industrial division targets municipal water systems and the electronics industry. Pall’s products provide clean drinking water to millions of people, while lowering the spread of disease and ensuring the integrity of food supplies around the world

Pall’s steadily growing sales are a product of a diverse global client base and old fashioned wear and tear; 75 percent of the firm’s revenues are generated by consumables.

The largest firm in the industry, Pall enjoys a strong competitive advantage both in terms of pricing and the depth of its client relationships. The company goes the extra mile by designing custom filtration systems, even though this work is less profitable up front. The upshot is that it allows Pall to create a long-term revenue stream. Once clients have purchased a customized filtration system from Pall, the cost of switching systems is prohibitively high, making them long-term Pall customers. These relationships have helped Pall capture about 7 percent of global market share in a highly fragmented industry.

Pall should realize strong revenue and earnings growth in both of its divisions as global infrastructure spending drives demand for water filtration systems. Meanwhile, the biotech industry is taking the lead in developing new drugs and medical devices, opening another growth avenue for Pall.

Pall is also expanding its presence in the Middle East, where desalination will play an important role in providing drinking water to a growing population. Pall offers a line of specialized filtration products for desalination applications that is enjoying strong sales growth in the Middle East.

Asia has also been a major region of growth for the company, particularly China, where environmental concerns and a series of food safety scares have led to tighter controls on air, water and even milk quality.

Asia accounted for 28 percent of Pall’s total 2010 sales, while its European operations generated 39 percent of revenue. The remaining revenue contribution was spread across the globe. Geographic diversity and a varied client base help insulate Pall against regional or industry-specific downturns.

Over the next two years, Pall’s earnings per share are expected grow by about 15 percent as a result of steadily growing revenues and improved efficiencies. These changes are expected to save Pall about $40 million per year in operating costs.

Over the long term Pall should post revenue growth in the mid-single digits–in line with the company’s historical performance–as it continues pushing into emerging markets. However, the three-year average earnings per share growth will slow from its current 25 percent to 12 to 15 percent as it becomes increasingly difficult to squeeze additional efficiencies from processes. Despite this slowdown, Pall still looks attractive for its long-term growth potential. –Benjamin Shepherd

WHY TO BUY

PALL CORP (NYSE:PLL. $43.32)

*Growing demand in Asia and the Middle East signals rising opportunity

*Lean processes enhance profitability

*Custom engineering ensures customer loyalty