We have reiterated our Underperform recommendation on provider
of liquid flow measurement products and control technologies,
Badger Meter Inc.
). Our view reflects subdued growth for automation sales, higher
operating costs and negative foreign exchange impact.
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Why the Reiteration?
Badger Meter, on Jul 18, reported earnings per share of 44 cents
for the second quarter of 2013, down 15.4% year over year and
below the Zacks Consensus Estimate of 55 cents. The decline was
caused by the litigation and pension charges, which together
impacted earnings by about 5 cents per share. However, net sales
rose 7.8% year over year to $88 million, mainly contributed by
higher sales of municipal water as well as industrial flow
Even though sales of Industrial flow products increased 2.4% year
over year to $1.1 million in the reported quarter, the segment
remains affected by the challenging construction sector. 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.
Gross profit fell 1% year over year to $29.8 million in the
quarter. Gross margin contracted 300 basis points year over year
to 33.8%, driven by lower prices and foreign exchange impacts.
Operating costs are expected to be higher due to added headcount.
Commodity costs, particularly brass and copper-based materials,
constitute a significant portion of Badger Meter's costs. If
costs are to rise and the company is unable to pass on the raw
material price increase, margins will be affected.
Moreover, weak growth expectation for automation sales, a tepid
macro economy and unfavorable foreign exchange translation impact
may affect the performance of Badger Meter going forward.
Following the release of second quarter results, Zacks Consensus
Estimates for 2013 and 2014 have went down 8.1% and 1.3%,
respectively, to $1.70 per share and $2.27 per share,
respectively. With earnings estimates for both 2013 and 2014 are
moving down, Badger Meter now retains a Zacks Rank #5 (Strong
Other Stocks to Consider
Among the other stocks in the same sector,
National Instruments Corp.
) look favorably placed with a Zacks Rank #2 (Buy).