On May 10, we downgraded our recommendation on provider of
liquid flow measurement products and control technologies,
Badger Meter Inc.
) from Outperform to Underperform. The downgrade followed its
lackluster first quarter results, lower sales in the municipal
water business, weak industrial sales and the expectation of
higher operating costs.
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Why the Downgrade?
Badger Meter's first quarter revenue declined 6% on a
year-over-year basis to $71.8 million in the quarter.
Higher-than-average snowfall, which significantly impacted meter
replacement activities, a 30% decline in sales to utilities in
communities in the Northeast affected by Hurricane Sandy as well
as concerns related to municipal budgets affected sales.
First-quarter earnings per share were reported at 20 cents, down
significantly from 42 cents earned in the year-ago quarter.
Badger Meter's earnings per share had been affected since 2011 by
the continued weakness in the municipal water business as
customers were compelled to stretch their decision-making process
driven by concerns regarding the economy. Purchase decisions are
subject to budgets, politics, pricing, service demands, etc.
Approximately 75% of the company's revenue is directly related to
water utility and municipal spending cycles, which historically
has been volatile and difficult to predict.
Even though improvement was noted in the last two quarters of
2012, sales declined in the first quarter of 2013. Badger Meter
cited higher-than-average snowfall as the largest headwind to
sales in the quarter. This is because fewer meters get replaced
in adverse weather conditions. There were also concerns related
to municipal budgets.
Industrial sales were up slightly due to an extra month of sales
from Racine Federated in the first quarter compared to the
prior-year quarter. However, on an organic basis (excluding one
month of Racine Federated) sales were down 14% as customer
uncertainty and soft industrial markets restrained sales.
Operating costs are expected to be higher due to added headcount
and amortization from the Aquacue acquisition. Commodity costs,
particularly brass and copper-based materials, constitute a
significant portion of Badger Meter's costs. If costs rise and
the company is unable to pass on the raw material price increase,
margins will be affected.
Other Stocks to Consider
Other players in the same industry, which look attractive at
current levels include
Roper Industries Inc.
) which carry a Zacks Rank #2 (Buy).