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On Mar 14, we maintained our Outperform recommendation on liquid flow measurement products and control technologies provider – Badger Meter Inc. (BMI - Analyst Report) – on the back of acquisition benefits of Racine Federation, recovery in municipal water sales, increasing demand for its products and competitor Elster's exit from the U.S water meter business.
 
Why Reiterated?
 
Badger Meter’s fourth-quarter earnings per share almost increased five fold to 39 cents on the back of a 22% increase in sales and improved margins.
 
Badger Meter’s acquired Racine Federated, Inc., a manufacturer and marketer of flow meters for the water industry and industrial metering and specialty products, in Jan 2012. The acquisition expands Badger Meter’ portfolio to 12 of the 16 available global flow technologies and will solidify Badger Meter’s presence in the industrial flow measurement market.
 
Municipal water sales had declined in 2011 due to concerns over municipal spending that delayed order decisions as well as slower housing starts. Sales picked up in 2012 on the back of higher sales of residential meters sold with technology as well as higher commercial meter sales. Continued recovery in residential construction and increase in housing starts during 2012 will likely boost Badger Meter’s municipal water sales. Furthermore, the company’s focus on new product development and its ORION brand will drive sales in the municipal water market.
 
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. 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. Badger Meter has introduced AMA, believed to be the next generation of metering technology, which will help to maintain its position as the market leader and meet customers’ future needs.
 
Badger Meter’s competitor for utility water meters, Elster, has decided to shut its U.S water meter business by mid 2013, presenting a sizeable opportunity for Badger Meter. Badger Mater is devising strategies to attract Elster’s former customers and would increase its market share from the current 28%. Furthermore, removal of this one player could have a positive impact on pricing dynamics in the space.
 
Other Stocks to Consider
 
Badger Meter currently retains a short-term Zacks Rank #2 (Buy) Other stocks in the same industry with a favorable Zacks rank are National Instruments Corporation (NATI - Snapshot Report), which carries a Zacks Rank #1 (Strong Buy), and Roper Industries Inc. (ROP - Snapshot Report) and Ametek Inc. (AME - Snapshot Report), which have a Zacks Rank #2 (Buy).

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