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Badger Meter, Inc.: A Cash Generating Machine with Too Stretched Multiples at the Moment


Last Month, Badger Meter, Inc. (NYSE:BMI) announced its 2023 Q4 results during its earnings call. The company posted, overall, strong sales performance, margins improvement, and record free cash flow for both Q4 and full-year 2023. In addition to taking a look at the last earnings call results and BMI’s financial position, this article aims to explore its latest acquisition operations, confront BMI with its peers, debate on its dividends position and to present my “SELL” position for the stock.


This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money.


This post is written by Caio Daud. A popular investor on eToro. Learn more about Caio here:


Caio is proud to say he is a Dividend Growth Investor. He is the founder of the Income Growth Office and is passionate about dividends. When he is not reading a book about investing, he is annoying his family and friends with new investment ideas or bragging about a company that has just increased their dividends.

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If you want want to purchase shares or fractional shares in Badger Meter, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.



Last Quarter Results


Quarter four earnings per share (EPS) reached $0.84, marking a notable 40% improvement compared to the previous quarter, beating Wall Street estimations.


Sales has been delivered in line with expectations, culminating in a 24% increase for the full year compared to 2022.


Other significant achievement in the fourth quarter was the generation of a record free cash flow amounting to $35.9 million.  For the full year, FCF also reached a record high of $98.1 million. This substantial amount underscores the company's ability to convert its net earnings into cash flow, with the conversion rate standing at an impressive 106%.


Compared to 2022, Free Cash Flow per Share has increased 28%.


Latest Acquisition


Beginning January 2024, Badger Meter has announced the acquisition of the select remote water monitoring hardware and software from Trimble Inc. (NASDAQ: TRMB), inclusive of the Telog brand of RTUs (remote telemetry units) and the Trimble Unity Remote Monitoring software. This acquisition enhances Badger Meter's smart water offerings by providing remote monitoring access across various applications.


Such operation resonates with the company’s strategic position of transitioning to “a smart water management company”, as mentioned in the earnings call.


Another concrete example of this vision was the acquisition announced on beginning of 2023 of Syrinix for £15 million. Syrinix is a privately-held company specialized in high-frequency pressure monitoring and leak detection within water distribution and collection networks. Sales from the acquired company rose by 60%, showcasing good results from the integration efforts.



Financial Position


After reviewing the data on Seeking Alpha, it is evident that Badger Meter's financial position as of January 31, 2024, is robust and sufficient to sponsor the latest acquisition operations. The $191.8 million in cash and short-term investments implies in good investments capability strengthened by the $83.5 million in receivables.


The total current assets, valued at $442.2 billion, serve to further fortify their financial strength. Furthermore, long-term assets, encompassing property, plant, equipment, and intangibles, contribute significantly to their asset base. Total liabilities lie at $200.4 million and are offset by substantial assets and equity. Notably, the total common equity stands at a high $516.5 million. Yet, the company currently holds no debt.


Looking at the situation from another angle, BMI's ability to achieve these impressive figures can be attributed to an examination of its sales growth in recent years, coupled with a regular strong free cash flow margin that has maintained a two-digit level for an extended period:



Sales have been growing with operating income accelerating at an even faster pace. This trend creates an environment of increasing operating margin:



BMI has consistently showed advancing operating and free cash flow margins. The sustained growth in sales not only supports the company's history of M&A but also facilitates the payment of increasing dividends.


Market Competition


Badger Meter strong capacity of generating cash to fund the above-mentioned acquisitions is reflected on the Quant Factor Grades from Seeking Alpha. We can see that is has overall higher scores in comparison to its peers.



From a Profitability standpoint, as evidenced by its operating margin and free cash flow margin discussed earlier, BMI holds a leading position alongside (NYSE: VNT). When we factor in Growth and EPS Revision grades, BMI emerges as the most favorable choice among its peers.


However, it appears that the market has already acknowledged this reality. Considering its Valuation (FWD P/E NON-GAAP of 41.16 and a TTM P/E GAAP of 46.29) and Momentum grades, BMI present the worst scores among its competitors


Another indicator of potential overvaluation lies in the company's dividend metrics.



Dividends


The company has increased its dividends by 16% in 2023. and maintains on average a two-digit pace of dividend growth in the last 10 years:



BMI is a dividend aristocrat and has paid increasing dividends for 31 years in a row already.


The “problem” is that BMI’s stock price is growing much faster than its dividends. We are seeing the lowest levels of dividend yield in a decade:


Quarter four earnings per share (EPS) reached $0.84, marking a notable 40% improvement compared to the previous quarter. This increase demonstrates enhanced profitability and performance during the period.


Another significant achievement in the fourth quarter was the generation of a record free cash flow amounting to $35.9 million.  For the full year, FCF also reached a record high of $98.1 million. This substantial amount underscores the company's ability to convert its net earnings into cash flow, with the conversion rate standing at an impressive 106%. This strong cash flow performance demonstrates the company's financial health and operational efficiency throughout the year.



Based on the Dividend Yield theory, Badger Meter is currently deemed overvalued by 18%, as its dividend yield surpasses the average of the last 5 years by that margin. According to this theory, a stock's dividend yield typically fluctuates within a certain range, and when it deviates to the upper or lower limits, a reversion to the mean is anticipated.


I believe that we may currently find Badger Meter's dividend yield approaching its lower limits, combined with its momentum, I expect a probable retracement in the share price in the next periods. Consequently, I defend a "SELL" position for the company.


Conclusion


To sum up, Badger Meter has reported strong last quarter results, showcasing improved earnings per share and record-breaking free cash flow (FCF). The company's solid financial position and strategic acquisitions align with its goal of becoming a smart water management market leader. However, concerns arise as the stock appears overvalued, communicating in an unusual low dividend yield. The recommendation is a " SELL" position, urging investors to exercise caution due to potential share price retracement.


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