On Jun 13, 2014, we issued an updated research report on Badger Meter Inc. (BMI), the manufacturer and marketer of flow measurement and control technologies products. Even though earnings per share of 32 cents marked a year-over-year rise of 60%, it lagged the Zacks Consensus Estimate.
Gross margin decreased 20 basis points (bps) to 34.7% due to product mix in the first quarter. Operating costs are expected to be higher due to increased headcount in the key areas of the company. Commodity costs, particularly of brass and copper-based materials which constitute a significant portion of Badger Meter’s costs, are also anticipated to increase. If costs of raw material rise and the company is unable to pass on the increase, margins will be affected.
Weak growth expectation from automation sales and macroeconomic headwinds along with the negative impact of foreign exchange may affect Badger Meter’s performance going forward.
Further, The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) increased to 49.6 in Apr 2014, from 48.8 in March. Though the index showed improvement, the reading below 50 signifies a decline in billings. Furthermore, weak public construction spending remains the most significant risk to a non-residential recovery, particularly in the light of further government spending cut which makes expected recovery in the non-residential market uncertain.
In addition, higher construction costs, labor shortage, lack of funds for real estate projects and adverse effects of sequestration are likely to remain challenges for the construction sector. This, in turn will affect Badger Meter’s sales.
Despite these negatives, Badger Meter will continue to benefit from investment in research and development as well as through introduction of several new products. Innovation in product offering is a key element of Badger Meter‘s growth strategy.
Recently, the company expanded its E-Series ultrasonic meters with a polymer version. It is a cost-effective alternative to the stainless steel version. E-Series continues to be widely accepted by customers even outside North America. In addition, the introduction of ORION SE, the first simultaneous drive-by fixed-network product, will help meet the rising customer demands.
Badger Meter also launched the BEACON Advanced Metering Analytics (AMA) system, thereby becoming the first major water meter company to provide water utilities with cost-effective cellular radio endpoints.
Replacement demand is also expected to improve which will drive growth in water meter. It is anticipated that unmetered communities will adopt metering in the future as conservation needs increase due to rising population. Utilities are adopting automatic meter reading (AMR) systems to optimize productivity, accuracy, reader safety, timeliness of billing and leak detection.
The company will also benefit from AMR/advanced metering infrastructure (AMI) expansion in the near term which is likely to boost Badger Meter’s sales and earnings prospects.
At present, Badger Meter has a Zacks Rank #4 (Sell).
Other Stocks to Consider
Some better-ranked stocks in the same industry worth considering include Roper Industries Inc. (ROP), Woodward, Inc. (WWD) and Mettler-Toledo International Inc. (MTD). All of these stocks have a Zacks Rank #2 (Buy).
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