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Bull of the Day

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I remember when Evian launched their ad campaigns here in the US in 80s, selling water for what then seemed like astronomical prices (who knew they were on to something).

In the United States, a liter of bottled water can cost up to $3 per bottle, while a similar volume of tap water costs less than one cent.  According to a NRDC study over 12 years ago, U.S. consumers paid between 240 and 10,000 times more per unit volume for bottled water than for tap water.

(There are 119.24 liters in a barrel, which means that a barrel of premium water would cost about $360 or 4.5 times more than oil)

To make things even more complicated, bottled water and tap water are regulated by different federal agencies: the Food and Drug Administration (FDA) regulates bottled water and the Environmental Protection Agency (EPA) oversees the quality of tap water.

Several studies have found that the enforcement and monitoring of water quality is irregular and inconsistent for both tap water and bottled water. But contrary to popular belief, Tap water contamination incidents must be reported promptly to the public, while the same is not true for bottled water.

The bottom line is that even though we pay a premium for our drinking water, potable water flowing constantly through the pipes in our homes and workplace is crucial and highly regulated.  In certain cities it doesn’t taste so bad either.  

A tap water renaissance would be wonderful for today’s Bull of the Day Mueller & Co. (MWA - Snapshot Report), but more realistic for its growth are the necessary improvements to American water infrastructure.  It’s a trend that’s not only needed, but demanded by the people.

Water is essential to our daily lives and it’s a quiet, but very powerful commodity that we tend to take for granted.

Water, water everywhere…
…but getting it to where it’s needed can be a problem. 

The truth is that Mueller & Co. MWA is not the company that is filtering your water for drinking or capitalizing on a shift from bottles back to the tap.  Their products and services actually help get the water to our homes, hydrants and business in addition to troubleshooting problems that lie beneath the streets.  

Mueller is one of the largest manufacturers of fire hydrants, butterfly valves and Iron Gate valves in the U.S. and Canada and offers the broadest product line of valves for residential water and gas systems.

Other product offerings include pipe repair products, water meters, tapping machines and tools, advanced metering infrastructure (AMI)/automated meter reading (AMR) and leak detection and pipe condition assessment technology and services.

The sales of Mueller’s products are heavily influenced by local water department specifications, so they know exactly what they need and fill a specific demand.

As cities age and grow, the need for replacement and/or improvement of this vital infrastructure is necessary.  Many of America’s cities are deficient in this area and it’s something they cannot avoid.  In America’s biggest water systems alone, 30% of pipes are 40 to 80 years old.

Aside from improvements, water leaks alone account for millions in losses for States and municipalities.

Ecologics, one of Mueller’s divisions allows water companies to accurately detect leaks and assesses the condition of water pipes—without breaking ground— through the use of their acoustic technology.

Earnings Flow & Insider Action
Back in late April, Mueller announced record earnings of 5 cents per share, beating the Zacks Consensus estimate for 2 cents or 150%.  The company more than doubled adjusted operating income to $24.7 million from $11.5 million versus the same quarter last year and saw a $31.6 million increase in net sales to $283.1 million from $251.5 million.

Margins improved and Mueller also redeemed $22.5 million principal amount of 8.75% Senior Unsecured Notes, reducing net debt leverage to 4.0x.

It was their best quarter since 2008 and shares responded appropriately, rocketing almost 35% from where they were trading before the earnings release.

Even with the rise, I noticed that several insiders were still buying shares around the $6.88 mark, or slightly above where they are currently trading; usually a bullish sign.

Analysts have also gotten more bullish after the results and have adjusted their target and estimates higher.

Mueller continues to see shipment volumes of their valves, hydrants and brass products increasing.  Moreover, net sales of Mueller Co.’s newer technology products and services more than doubled in the quarter on a year-over-year basis demonstrating the footing these products and services continue to gain in the marketplace.

Share valuations are certainly rich at 35 times forward earnings, but if Mueller can deliver on their current trajectory, that multiple could drop dramatically and make Mueller stock a little more easy to swallow.

The Charts
First off, it’s important to realize that this is a volatile stock.  Yesterday’s 8.75%, no news drop is proof of that.  Shares tend to oscillate roughly 4.5% per day if you are looking to quantify the moves.

The good news is that the stock remains in a bullish trend and above the 50 and 200 day moving averages of $6.57 and $5.17 respectively.

Share should see a decent bounce as they are well outside of the lower Bollinger band in the over-sold territory and should also hold the 50 day moving average barring any catastrophic broad market news.

In the short term it wouldn’t be unrealistic to see the stock back in the $7.75 range and higher. 

While the fundamentals aren’t perfect, MWA is a Zacks Rank #1 with stable technicals and a cheap absolute share price.

For more players in the “water space,” you can also checkout American Water Works Co (AWK - Snapshot Report) - Zacks Rank #3, Consolidated Water Co (CWCO - Snapshot Report) – Zacks Rank #2 and American Sts Water Co (AWR - Snapshot Report) – Zacks Rank #2. 

Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

Zacks Whisper Trader- Learn to buy stocks likely to have robust earnings BEFORE they report.

Zacks TAZR Trader – Technical Analysis + Zacks Rank. Best of both worlds approach to find timely trades.

Follow Jared A Levy on twitter at @jaredalevy

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