On Dec 5, we maintained our Neutral recommendation on provider
of liquid flow measurement products and control technologies,
Badger Meter Inc.
). 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.
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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
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
). Each carry a Zacks Rank #2 (Buy).