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We have recently upgraded our recommendation from Neutral to Outperform on Badger Meter Inc. (BMI - Analyst Report), a manufacturer of flow measurement and control products. The stock currently retains a short-term Zacks #1 Rank (Strong Buy).

Badger Meter reported strong third quarter 2012 results with EPS rising 35% year over year to 62 cents and way ahead of the Zacks Consensus Estimate of 47 cents. The outperformance was driven by robust sales, improved profit margins as well as successful ongoing cost reduction activities.
 
Total revenue surged 25% on a year-over-year basis to $87 million in the quarter, outperforming the Zacks Consensus Estimate of $81 million. The acquisition of Racine Federated as well as increased sales of the company’s municipal water products contributed to the increase.
 
In January 2012, Badger Meter acquired Racine Federated, Inc., a manufacturer and marketer of flow meters for the water industry and industrial metering and specialty products. The integration is on track and is expected to be completed by 2012 end. Racine Federation, along with Cox Flow Measurement and Remag, will boost Badger Meter’s flow measurement business globally.
 
The acquisitions broadened the product range and customer base of 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 been converted to an automatic meter reading (AMR) or advanced metering infrastructure (AMI) technology. Although there is a growing interest in AMI and advanced metering analytics (AMA) communication by water utilities, 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, which is believed to be the next generation of metering technology and help maintain the company’s position as a market leader and meet customers’ future needs.
 
Badger Meter has a strong balance sheet and healthy cash flows, helping it to invest in growth opportunities and in developing new products and return cash to shareholders. Even after its largest ever acquisition of Racine Federated, Badger Meter has no long-term debt on its balance sheet and also maintains a total debt-to-capitalization ratio of 30%. 
 
Badger Meter continues to reallocate its free cash flow by paying dividends consistently and repurchasing shares. The company has increased its dividend for 20 consecutive years. In August this year, Badger Meter increased its quarterly common stock dividend by 6.25% to 17 cents per share. In November last year, Badger Meter authorized the repurchase of shares worth up to $30 million over a period of two years, which was completed in the second quarter.  
 
Headquartered in Milwaukee, Wisconsin, Badger Meter is a leading innovator, manufacturer and marketer of flow measurement and control products, catering to water and gas utilities, municipalities and industrial customers across the globe. Its product lines fall into two categories – water applications and specialty applications – and are used in a wide variety of applications, including water, oil and lubricants. The company manufactures its products in its facilities across the U.S., Germany, Mexico and Switzerland. Badger Meter competes with Itron, Inc. (ITRI - Analyst Report) and Roper Industries Inc. (ROP - Snapshot Report).

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