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The dire condition of drinking water systems in the U.S. has been
made glaringly apparent with the recent debacle in Flint, Michigan
that has left numerous citizens in the community suffering from
chronic health conditions as a result of contaminated water.
We had no further than our own coverage group to find a company that
could help solve problems the drinking water system. Mueller Water Products
(MWA: NYSE) is a supplier of water meters, pipe
fittings, valves, pipe repair components, and fire hydrants.
Mueller’s Echologics leak detection solution gives water
utilities details on water infrastructure operation would seem to
make Mueller a go-to resource for water system owners, since early
leak detection could save millions in wasted capital spending.
last post we looked at data from the American Society of Civil Engineers
(ASCE) and the U.S.
Environmental Protection Agency that reveal the high cost of
replacing and improving the drinking water infrastructure.
Even at the current sluggish pace of water system repair of about
5,000 miles per year, the repair portion of the U.S. water
infrastructure market value is near $5 billion. The Freedonia
Group reports that
world demand for water infrastructure equipment for both repair and
expansion is expected to increase 6.5% to $101.7 billion in
2016. The growth is boosted in part by expansion of water
supply lines in developing countries. Demand in developed
countries is primarily for repair and upgrade of existing pipes and
Mueller Water Products
No matter how it is measured water infrastructure is a large market
with numerous competitors offering, in many product categories,
highly commoditized components. Strong brand recognition and a
well entrenched sales network have helped Mueller win and retain
market share. The company goes head to head with the likes of
Tyco International (TYC: NSYE) with its well-developed fire and water division.
While both McWane, Inc. and American Cast Iron Pipe
Company are private companies and provide limited financial
information to the public, it is clear that both are significant
players in the business of pipes and values. McWane revealed
sales of $1.7 billion in 2014, and American is through to be near
$500 million in annual sales.
Mueller reported $1.15 billion in total sales in the twelve months
ending December 2015, representing a top-line decrease of
1.7%. The total sales performance figure is somewhat
misleading in as much as Mueller sells its pipe components and
values into the oil and gas industry as well as to water system
owners. With the price of crude oil and the entire
petrochemical chain at record low prices, shipments to oil and gas
customers have been down. However, sales of the couplings,
valves and hydrants used in the domestic water systems have been
robust. In the most recent financial report for the quarter
ending December 2015, Mueller management reported 9.2%
year-over-year growth in the domestic water segment.
In deciding whether MWA is to be your play in the water
infrastructure market, sales is only one element. In a highly
competitive market, a profitable operating structure can deliver
strong earnings even if sales growth remains sluggish. Mueller
delivered $57.3 million in net income on $1.15 million in total
sales in the last reported twelve months ending December 2015.
Reported net income represented a net profit margin of 4.9% compared
to 4.7% in the year-end fiscal year ending September 2014.
Thus while Mueller has struggled to keep its top-line up in the wake
of lost business with its oil and gas customers, a lean operating
structure has helped drive more profits to the bottom line.
The cash flow from operations echoes the Mueller profit story.
In the most recently reported twelve months ending December 2015,
10.2% of sales were converted to operating cash flow. This
compares to an average of 10.1% in the previous three fiscal
years. The strong cash generation has enabled investments,
debt reduction, as well as a consistent dividend payment.
Crystal Equity Research has a buy rating on MWA because we like
companies that move quickly and decisively to protect profits even
when sales growth is challenged. Mueller management has
defended its share in the water infrastructure market and even more
zealously guarded its profits.
Investors have only been willing to pay 16.8 times projected
earnings for MWA in recent trading, which is slightly above the
anticipated five-year earnings growth rate (12.5%) for the
company plus dividend yield (0.84%) that total 13.3. Mueller
has few direct peers for sake of comparison. For perspective
the broader industrial equipment and components market of which the
company is a part, trades at 15.5 times forward earnings
multiple. Interestingly, the utilities sector, which includes
the public water system owners that bear the risk of dated and
deadly water infrastructure, is trading at a higher 17.3 times
Debra Fiakas is the Managing Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.
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