BMI Financial Analysis

Analysis Date: 2/3/2025

Business Model

Badger Meter operates in two product lines: Utility Water and Flow Instrumentation. Utility water product line sales are driven by the adoption of smart water solutions including cellular AMI, endpoints, and SaaS. Flow instrumentation product line sales are derived from water-focused end markets offsetting declines in de-emphasized applications.

Revenue Sources

• Utility water product line sales (driven by cellular AMI adoption, meters, endpoints, SaaS)
• Flow instrumentation product line sales (water-focused end markets)
• Software sales (BEACON SaaS, part of Utility Water solutions)

Income Statement Analysis

• Net sales increased by 12.5% year-over-year, indicating strong demand. (Pro)
• Gross margin improved by 15.8%, reflecting positive sales mix and price/cost management. (Pro)
• Operating earnings increased significantly by 22.3% year-over-year, driven by sales growth and margin expansion. (Pro)
• SEA expenses increased by 10.5%, but as a percentage of sales, it improved by 40 basis points, indicating operating leverage. (Pro)
• Net earnings grew by 24.3%, showcasing strong profitability growth. (Pro)
• Interest income increased significantly, contributing positively to earnings before income taxes. (Pro)
• Other pension and postretirement costs decreased, slightly improving profitability. (Pro)

Balance Sheet Analysis

• Cash and cash equivalents increased significantly by 54%, indicating strong cash generation and liquidity. (Pro)
• Inventories decreased by 6.7%, suggesting improved inventory management. (Pro)
• Total current assets increased by 22.2%, reflecting overall growth and increased liquidity. (Pro)
• Payables decreased by 32%, which could be a con if it indicates strained supplier relationships, but may also indicate efficient payment management. (Neutral to Con, needs further investigation)
• Shareholders' equity increased by 17.4%, reflecting increased retained earnings and overall financial strength. (Pro)
• Other long-term assets increased significantly, requires further investigation to understand the nature of these assets. (Neutral)
• Long-term employee benefits and other liabilities increased significantly, needs further investigation to understand the drivers. (Neutral)

Capital Allocation

Badger Meter demonstrates a balanced capital allocation strategy: Dividends: They are a dividend aristocrat with 32 years of consecutive annual dividend increases, and doubled their dividend rate in the last 5 years, showing commitment to returning value to shareholders. Share Repurchases: Not explicitly mentioned in the provided documents, suggesting less emphasis on share repurchases compared to dividends and acquisitions. Business Reinvestment: Focus on organic growth through innovation in hardware and software (BlueEdge platform), and inorganic growth through strategic acquisitions like SmartCover to expand their solution suite and market reach. They are investing in expanding their technology-enabled software offerings and solutions for smart water management. Strong cash flow generation enables these investments.

Management Commentary

We capped off another record year with strong 4th quarter results across sales, operating profit, earnings per share and cash flow metrics.

We delivered 18% sales growth in 2024, surpassing $800,000,000 in revenue with a 5 year top line CAGR of 14%.

Operating profit margins expanded 450 points over the last 5 years with both gross margin improvement and SG and A leverage contributing to the margin expansion.

EBITDA margins hit a record 23% in 2024.

While we continue to anticipate that our SEA as a percent of sales will improve over the long term, the addition of Smart Cover will reset the bar higher than 2024 levels.

In the short term... for 2025, it is EPS dilutive and that it turns to accretion in year 2 [for SmartCover acquisition].

Overall Sentiment: Positive and confident. Management expresses strong pride in the record-breaking year and Q4 performance. They are enthusiastic about the SmartCover acquisition and its strategic fit within their BlueEdge platform. While acknowledging short-term EPS dilution from the acquisition and a reset of SEA leverage, the overall tone is optimistic about continued growth and shareholder value creation, underpinned by a resilient demand environment and robust industry backdrop.

Recommendation

Rating: Buy

Reason for Rating: Badger Meter demonstrates strong financial performance with record sales, profit margins, EPS growth, and cash flow. The acquisition of SmartCover strategically expands their BlueEdge platform and addresses a growing market need. While there might be short-term EPS dilution and SEA pressure due to the acquisition, the long-term outlook remains positive due to resilient demand for smart water solutions, strong market position, and effective execution. The company's balanced capital allocation strategy and consistent dividend increases further enhance its investment attractiveness.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/3/2025, 8:20:46 AM