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Badger Meter Retained at Neutral

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On Dec 5, we maintained our Neutral recommendation on provider of liquid flow measurement products and control technologies, Badger Meter Inc. (BMI - Free Report) . While the company will continue to benefit from acquisitions, new product development and expected recovery in replacement demand, global economic weakness as well as subdued growth of automation sales may hurt performance moving forward.

Why the Reiteration?

Badger Meter, on Oct 16, reported third-quarter 2013 earnings of 63 cents per share, up 1.6% year over year. The improvement was led by the ongoing cost reduction initiatives and lower effective tax rate. Earnings surpassed the Zacks Consensus Estimate of 61 cents.

Net sales also increased 6.7% year over year to $93 million, beating the Zacks Consensus Estimate of $89 million. The gain was aided by higher sales of residential and commercial municipal water products, partly offset by a decrease in industrial and specialty product sales.

Gross margin contracted 380 basis points (bps) to 35.6% in the quarter, driven by increase in costs due to the industry shift toward more expensive lead-free brass as well as product mix. Badger Meter is implementing a price hike, effective Jan 2014, to pass on a portion of these increased costs. This is likely to result in margin expansion in the coming quarters.

In Apr 2013, Badger Meter purchased the Silicon Valley technology company -- Aquacue, Inc. -- which is poised to release several new products in the first quarter of 2014. Badger Meter believes it will benefit from the launch of a polymer version of E-Series ultrasonic residential water meter. The company projects that this solid-state low cost meter will drive growth.

In addition, replacement demand is expected to improve. It is anticipated that unmetered communities will adopt metering in the future as conservation needs grow due to rising population. Utilities are adopting automatic meter reading (AMR) systems to optimize productivity, accuracy, reader safety, timeliness of billing and leak detection.

Badger Meter will also benefit from AMR/advanced metering infrastructure (AMI) expansion in the near term which is likely to boost its sales and earnings prospects.

Despite these positives, weak growth expectation for automation sales and a tepid macro economy along with the negative impact of foreign exchange may negatively affect the company’s performance going forward. Operating costs are likely to expand due to added headcount in the key areas of the company during 2013-14.

Moreover, higher construction costs, labor shortage, lack of funds for real estate projects and adverse effects of sequestration are likely to remain headwinds for the construction sector. This, in turn will affect Badger Meter’s sales.

Badger Meter currently has Zacks Rank #3 (Hold).

Other Stocks to Consider

Other better-ranked players worth considering in the sector include Ametek Inc. (AME - Free Report) , Newport Corp. and RealD Inc. . Each carry a Zacks Rank #2 (Buy).

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