On Nov 19, 2014, we issued an updated research report on Badger Meter Inc. (BMI). The provider of liquid flow measurement products and control technology will benefit from continued strength in the municipal channel, introduction of new products, acquisitions and improved sales mix. However, higher debt, delivery delays, short-term increase in inventory and fluctuation in foreign exchange rates remain headwinds.
On Oct 15, Badger Meter reported record third-quarter 2014 earnings per share of $0.71, a 12.7% year-over-year improvement, driven by higher sales of municipal water products and flow instrumentation products. Municipal water sales, which accounts for around 73% of total sales, increased 4% year-over-year to $69.9 million in the quarter.
The company expects the municipal channel to boost sales based given that U.S. replacement sales are expected to drive water meter growth consistently at a rate of 1—4% annually over the next 3—5 years. It is also expected that more unmetered communities will adopt metering in the future as conservation needs increase owing to population shifts. Further, automatic meter reading (AMR) market will increase 10% in the near term which should enhance Badger Meter's sales and earnings growth prospects.
Innovation in product offering is a key element of Badger Meter‘s growth strategy. Its new products, including the E-Series Meter, ORION SE Radio and the BEACON system, will drive higher sales. The company expects strong growth in this product line as new orders continue to arrive. E-Series also appears to be growing faster than expected, prompting management to move production to a larger facility. Continued demand for the E-Series meter should aid sales growth.
In addition, Badger Meter will benefit from acquisitions. The acquisition of National Meter and Automation, Inc., closed on Oct 1, 2014, will add around $15 million of incremental revenues to Badger Meter (after eliminating intercompany sales). The acquisition will also help Badger Meter to serve the market more efficiently, providing benefits to customers and other distributors while aiding bottom-line growth.
Moreover, Badger Meter’s margins are expected to trend higher as cost pressures subside and sales mix improves. The company will also gain from investment in research and development.
On the flip side, Badger Meter will witness increase in inventory in the short term due to a major production move down in the Mexico facility. Additionally, the company relies on single suppliers for most brass castings and certain electronic subassemblies in several of its product lines which would result in higher cost of materials. Thus, delivery delays, short-term increases in inventory and higher quality control costs will hurt growth.
Furthermore, Badger Meter will witness higher debt balances in the fourth quarter due to the purchase of National Meter & Automation. A tepid macro economy along with the negative impact of foreign exchange rates may also affect Badger Meter’s performance going forward.
Badger Meter carries a Zacks Rank #3 (Hold).
Other Stocks that Warrant a Look
Some better-ranked stocks in the same industry worth considering include Roper Industries Inc. (ROP), Thermon Group Holdings, Inc. (THR) and Woodward, Inc. (WWD). All these stocks carry a Zacks Rank #2 (Buy).
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