We maintain our Neutral recommendation on Badger Meter Inc. (BMI - Analyst Report). We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Badger Meter’s recent acquisition of Racine Federated, Inc., a manufacturer and marketer of flow meters for the water industry and industrial metering and specialty products, will increase the company’s flow measurement business globally. The acquisition of Racine Federated along with previously acquired Cox Flow Measurement and Remag broadened the product range and customer base for Badger Meter.
It also has opened the door to future expansion in the global arena. Furthermore, Racine Federated's products carry slightly higher margins and thus will contribute to margin expansion for Badger Meter.
There are approximately 53,000 water utilities in the United States of which less than 30% have converted to an automatic meter reading (AMR) or advanced metering infrastructure (AMI) technology. Although, there is growing interest in AMI and advanced metering analytics (AMA) communication by water utilities, the majority of utilities continue to prefer AMR technologies for their applications. Badger Meter’s ORION technology has been selected by an increasing number of water utilities as their AMR solution.
According to the company, even with growing interest in AMI and AMA, AMR will continue to be the first choice for a number of years as it is the most cost-effective solution available currently. However, the company has recently introduced AMA, believed to be the next generation of metering technology, which will help maintain the company’s position as a market leader and meet customers’ future needs.
Badger Meter continues to reallocate its free cash flow through dividend payments and share repurchases. The company has increased its dividend for 19 consecutive years. In August last year, Badger Meter increased its quarterly common stock dividend by 14.3% to 16 cents per share.
Keeping up with the trend and backed by its strong cash flow and balance sheet, we expect another dividend hike this year. In addition, it has also announced a repurchase of up to $30 million of shares over a period of two years.
On the flipside, Badger Meter’s earnings were affected in 2011 by the continued weakness in the municipal water business as customers delayed their decision-making process driven by concerns regarding the economy.
Approximately 75% of the company's revenue is directly related to water utility and municipal spending cycles, which has been difficult to predict and volatile historically. Even though improvement was noted in the first quarter, it is not clear whether this will be lasting considering the economic uncertainty.
Commodity costs, particularly brass and copper-based materials, constitute a significant portion of Badger Meter’s costs. Even though copper costs declined in the first quarter, considering the volatility, if costs rise and the company is unable to pass on the raw material price increase, margins will come under pressure.
Milwaukee, Wisconsin-based Badger Meter Inc. provides liquid flow measurement products and control technologies serving water and gas utilities, municipalities and industrial customers worldwide. The company’s product lines will fall into three categories: Municipal water, Industrial flow and Specialty products. It competes with Itron, Inc. (ITRI - Analyst Report) and Roper Industries Inc. (ROP - Analyst Report).