Lower Costs Help Badger Meter

Badger Meter (BMI) reported its third quarter results yesterday, after market close. The company reported earnings of 47 cents per share, above the Zacks Consensus Estimate of 44 cents per share and up 20.5% from 39 cents reported in the prior-year quarter.

Despite an 11.6% decline in sales, earnings during the quarter were higher than last year as the company benefited from lower commodity costs, ongoing cost reduction efforts, and pricing discipline. Gross margin in the quarter increased significantly to 39.0%, compared to 34.0% in the comparable quarter of 2008 due to favorable raw material pricing.

Sales to the utility market, which constitutes more than 80% of total revenue, declined 9% compared to the third quarter of 2008. The utility market is facing a downturn as the customers are postponing purchasing decisions while they wait to see if they can receive federal funds for infrastructure improvements. In the near-term we expect the utility market sales to remain depressed due to the current economic slowdown and uncertainty surrounding allocation of federal funds.

Sales of the company’s industrial products declined 24% compared to the prior-year quarter due to economic recession leading to weak demand across all the company’s industrial product lines.

We expect the weakness in the utility as well as industrial markets to continue in the fourth quarter. However, we expect the company to post higher earnings for 2009 as lower costs offset the decline in sales.

Although the uncertainty regarding the stimulus funding is adversely impacting the company’s utility market sales, we see significant long-term growth opportunities in this market as water utility customers upgrade to advanced metering (AMR/AMI) systems from manually read meters.

Moreover, Badger Meter has started selling its Orion technology to natural gas utilities for installation on their gas meters, which generated around $3.4 million in revenue last year. The company recently won a contract to supply Orion radio-frequency products for gas meters to Duke Energy. This is the company’s first major win in the natural gas utility market.

Badger Meter continues to invest in new products and technologies to meet evolving customer needs. The company believes that its operating cash flows and its ability to raise capital will provide adequate resources to fund ongoing operations and new product developments.

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