On Sep 19, 2014, we issued an updated research report on Badger Meter Inc. (BMI). While innovative product offerings and accretive acquisitions are the positive attributes of the stock, dependence on single suppliers, a tepid macro economy and volatile foreign exchange rates remain headwinds for Badger Meter
Notably Badger Meter reported record earnings per share of 61 cents in second-quarter 2014, increasing 39% year over year, driven by higher sales of municipal water products. Badger Meter is witnessing significant increase in sales of two municipal water products, introduced last year.
Sales of ORION SE two-way fixed network meter reading systems and the new polymer version of the company’s E-Series line of ultrasonic meters for residential and commercial applications continue to ramp up as they gain market share. Further, Badger Meter’s new BEACON Advanced Metering Analytics (AMA) system, made it the first major water meter company to provide water utilities with cost-effective cellular radio endpoints.
The company expects strong growth in this product line as new orders continue to arrive. With these new products, including the E-Series Meter, ORION SE Radio and the BEACON system, Badger Meter is optimistic about long-term growth opportunities.
Badger Meter is committed to pursuing accretive acquisitions that will add new businesses and product lines. On Aug 12, the company signed a stock purchase agreement to acquire National Meter and Automation, Inc. The acquisition which is expected to close on Oct 1, 2014, will add around $15 million of incremental revenues to Badger Meter (after eliminating intercompany sales). Post buyout, National Meter will become a regional distribution center for Badger Meter and will help in offering services including meter testing, leak detection, water audits, meter and meter reading system installation and meter reading.
In addition, Badger Meter announced a 5.6% increase in its quarterly dividend to 19 cents per share on Aug 8. The new annual dividend rate is now 76 cents per share. The company increased its dividend payments for the 22nd consecutive year, which not only reflects its commitment to shareholders but is also expected to aid long-term growth.
However, Badger Meter 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, delivery delays, short-term increases in inventory and higher quality control costs in the short term.
Further, a tepid macro economy along with the negative impact of foreign exchange rates may affect Badger Meter’s performance going forward. Operating costs are expected to be higher due to added headcount in key areas of the company during 2014.
Badger Meter carries a Zacks Rank #2 (Buy).
Other Stocks that Warrant a Look
Some better-ranked stocks in the same industry worth considering include Roper Industries Inc. (ROP), Woodward, Inc. (WWD) and Ametek Inc. (AME). All these stocks carry a Zacks Rank #2.
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