Badger Meter: Digging Into Major Downside Risk

by Sonya Colberg, Senior Editor - 11/3/2015 10:08:09 AM

After three down quarters in a row, Badger Meter (BMI) will have to dig like mad to suppress another big profit decline next quarter.

The water meter company recently reported year-over-year earnings dropped off a cliff – a teeth-rattling 18.6 percent. In fact, company leaders used the words "disappointing" or "disappointment" four times during the last conference call to describe financial results.

No wonder. The chart below shows Badger’s earnings performance.

(Source: Badger SEC filings)

And more disappointments loom. In fact, even normally optimistic analysts expect a 14 percent decline in earnings this year.

The company has not responded to a request for comment, but investors may find other viewpoints here.

Before we focus on several highlights, let's look at some additional downside risks for the Milwaukee, Wisconsin-based water meter and flow-measuring technology company:

*Shares trade at a ridiculous 14.6 times EBITDA and 33 times Earnings Per Share.

*Stock currently trades near analysts’ top price target.

*Normally optimistic analyst firms have downgraded the stock or rank it a “hold.”

*Insiders are dumping company stock.

*Badger has a history of earnings misses.

*Badger blames Itron for its recent revenue disappointment.

*The cash position is only $4 million.

*Risks are exacerbated by razor-thin margins, fierce competition, economic softness, continuing inventory problems, bad weather and poor flow-measuring technology demand for oil rigs during the ongoing oil patch malaise.

* More Disappointments Poised To Spill Over Into Next Quarter

Understandably, analysts groused - and management whined – about recently released financials.

Robert W. Baird analyst Richard Eastman referred to the “lackluster” business and worried about next quarter.

“It’s pretty lackluster but does the business feel like a typical fourth quarter kind of seasonality …?” Mr. Eastman asked management during the earnings call.

CEO Rich Meeusen answered: “I would expect so with a little bit of a positive impact from the catch up.”

There are two interesting aspects of that verbal exchange. First, Badger expects seasonal doldrums because cold weather slows down construction and its municipal customers – customers already constrained by a soft economy. In fact, the company blamed snow, a hurricane and city budget concerns for a 53.5 percent profit plunge early in 2013.

Second, the catch up Mr. Meeusen referred to revolves around inventory piling up in the Badger warehouse and about $6 million worth of potential sales idled.

*Itron To Blame For Inventory Overload?

Badger offers its own old-style meters, or meters made “smart” by adding its own radios or the more popular radios made by Itron. The radio-meter combined is about $100 to $150. The meter sold alone is about $40.

Itron has dominated the area and in fact knocks down 30 percent margins versus Badger’s ~12 percent margins. But Itron had problems with the radios that resulted in a "product replacement," essentially a recall.

So Badger primarily blamed its revenue miss – record sales of $99.4 million that fell below consensus estimates of $103 million - on Itron troubles.

“The continued weak dollar, the depressed oil and gas market and the delayed sales caused by the unavailability of radios from our alliance partner, all contributed to weaker than expected revenues,” CEO Meeusen told analysts.

Mr. Meeusen said he hopes that pile of inventory will be cleared over the next couple of quarters or so.

But if Badger’s radios are as good as Itron’s, why didn’t Badger just attach its meters to its own radios and save some blood, sweat and tears – and about $6 million in potential sales?

Management suggested that would be more difficult than it sounds because of compatibility issues.

"So generally if a customer had 40% of the city done with Itron, it’s very hard for us to convince them to suddenly start putting in ORION radios," said Mr. Meeusen.

Maybe so, but Mr. Meeusen seemed to contradict what he said the previous quarter. He said Badger has “many customers” who buy Badger meters and Itron radios, and use the two together:

We have three ways that were impacted. One is that we buy radios from Itron and put them with our meters and sell them to customers. We also sell radios directly to Itron – we sell meters directly to Itron. They put them with their radios and sell them to their customers. And then the third way is we have many customers who buy the meters from us and the radios directly from Itron.”

Badger seems to be blaming others for a revenue miss that might not have been so bad if the company had just handled things a little better. And it remains to be seen if Badger can elegantly resolve this issue within several quarters or at all.

*Cash Deteriorates, Earnings Drop

The company shows some concerning financial trends.

Badger suffered a stunning 60 percent drop in cash over the past nine months compared with a year earlier.

(Source: Badger SEC filings)

* How Are Badger’s Margins? Pathetic

This is a slow-growth industry but Badger’s operating margins are also really bad.

Alarmingly, the most recent margins are among the worst in 10 years. Here’s the chart:

(Source: Badger SEC filings)

Margins are a huge worry because brass and copper make up the bulk of Badger’s expenses. And margins will be hurt when these costs jump and Badger can’t pass along the increase.

Noting most of the third quarter’s sales hop came from an acquisition, chief financial officer Rick Johnson told analysts during the recent earnings call:

“With the lower than anticipated sales, the lower margins and higher selling expenses, we reported lower earnings than last year.”

Get ready for more disappointing earnings.

*Badgered By Analysts’ Downgrades, “Hold” Ratings

While analysts tend to take a highly optimistic view of the companies they rank, Badger isn’t getting the warm fuzzies.

Zacks earlier this week ranked Badger a “Hold,” giving it a “B” for growth, a “D” for momentum and we think most significantly especially for long-term investors, an “F” for value.

Zacks noted lower margins, higher selling, engineering and administration expenses from the National Meter acquisition and high tax rate, plus that decisive earnings decline.

Robert W. Baird downgraded Badger in July to “Neutral,” just a month after Boenning & Scattergood also downgraded it to “Neutral.”

Interestingly, Badger rival/partner Itron recently got an upgrade to “Buy” from “Hold” and a price target increase from $35 to $45 per share from Canaccord Genuity.

*BMI Is Already At Price Target

The stock is already trading mere pennies below analysts’ tip-top price target. Indeed, these expectations seem exceptionally misplaced. After all, Badger is trading at nearly 16 times EBITDA and 33 times earnings per share, based on …what???

Here’s the price target summary:

(Source: Yahoo Finance)

Experience tells us that once the stock’s ripped to the moon, the teeth-gnashing drop will be sudden and soon.

*Historical Earnings Misses

Investors and Badger management can’t really blame analysts for their reticence when it comes to Badger. The company has quite a reputation for missing earnings.

*Fierce Rivals

Meanwhile, Badger is locked in a fierce battle with rivals ranging from private companies like Sensus, Neptune, Elster and Mueller as well as public companies like Roper Industries (ROP) and Itron (ITRI). This is a difficult, slow-growth business potentially fraught with issues amid a competitive environment. For example, rival-partner Itron has been dealing with recent issues including the product replacement costing about $25 million and the departure of officers. But even compared to currently troubled Itron, Badger isn’t faring well, as the chart indicates.

(Source: Yahoo Finance)

The chart above indicates that, in nearly all respects, Badger falls well below its publicly traded rivals.

And if we consider Badger’s stock performance versus its peer group, investors can see that a $100 investment in the peer group would have paid off better than the same investment in Badger. A $100 Badger investment would have reached $161 in 2014, while the peer investment would be worth over $183.

(Source: Badger SEC filing)

*Insiders Hit Sell!

Investors like to see that company executives have some skin in the game. But that isn’t the case here, as Badger shows an underwhelming level of management buy-in.

And these minimally invested insiders have dumped more than 60,000 shares of Badger just since May.  All buying is limited to executions of options as cheap as $18 per share.

Highlights from insider sales include:

*Chief financial officer Richard Johnson dumped ~25,000 shares in May, leaving only ~90,000 in his hands.

* Vice president of engineering, Fred Begale, unloaded more than one-third of his entire company stake in June.

* Last week, frequent seller and former senior vice president Ronald Dix sold another 1,000 shares. His holdings are down ~20 percent since February.

Here’s a snapshot of insider trading:

(Source: Nasdaq)

All that selling makes investors wonder: What is so wrong with the company that makes insiders want to dump the stock?

*Conclusion

This company is not far from a $1 billion market cap but holds $4 million cash and enough challenges to send it running for the nearest den. With so little cash in its paws, Badger must be thinking about a stock offering before too long.

Indeed, the deeper TheStreetSweeper digs, the scruffier Badger looks. We think a fair valuation for the stock would be about $37 per share.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in MBI and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].

 

 

 

 

 

 

 

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