New Foundry Will Deliver Operational Efficiencies Starting In 2025

Key Takeaways

• Transition to a modern foundry and supply chain improvements are expected to enhance margins and operational efficiency.
  
• Infrastructure spending and product demand provide opportunities for revenue growth not yet included in current forecasts.
  
• Geopolitical tensions and economic uncertainties threaten Mueller Water Products' supply chain, revenue, and margins, while internal changes may incur short-term costs.

Catalysts

Manufactures and markets products and services for the transmission, distribution, and measurement of water used by municipalities, and the residential and non-residential construction industries in the United States, Israel, and internationally.

• The closure of Mueller's legacy brass foundry and transition to a state-of-the-art foundry is anticipated to generate an 80
• to 100-basis-point annualized improvement in gross margin starting in the second half of 2025, as well as increased operational efficiencies. (Impacts: gross margins, manufacturing efficiencies)
  
• Strong order levels, particularly for short-cycle products like iron gate valves and hydrants, are supported by normalized lead times, which should help facilitate consistent volume growth and revenue conversion from healthy order activities into shipments. (Impacts: revenue growth, operational efficiency)
  
• The anticipated benefits from the latest pricing actions and manageable exposure to new tariffs due to predominantly U.S.-based sales and vertically integrated manufacturing could help maintain or improve net margins. (Impacts: net margins, pricing power)
  
• Investment and focus on supply chain efficiencies, operational excellence, and advanced manufacturing capabilities are poised to drive productivity and margin expansion, particularly with the new foundry capabilities. (Impacts: operational efficiency, profit margins)
  
• Potential growth opportunities from increased infrastructure spending, particularly with lead service line replacement projects, could further boost sales growth. These are not yet factored into current guidance, suggesting potential upside to revenue projections. (Impacts: revenue growth, market expansion)

Mueller Water Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mueller Water Products's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $275.7 million (and earnings per share of $1.8) by about March 2028, up from $136.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 31.7x today. This future PE is lower than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Mueller Water Products Future Earnings Per Share Growth

Risks

• The potential imposition of new tariffs, particularly on goods from China, could increase costs for Mueller Water Products, impacting their supply chain and leading to potential price increases or sourcing challenges. This could negatively affect their gross margins if not adequately managed.
  
• The company is anticipating volume headwinds due to normalized lead times and channel inventory levels, which could lead to fluctuations in revenue as customer orders adjust to reflect these changes.
  
• Disruptions arising from geopolitical tensions, such as the Israel-Hamas war, have already impacted some product lines like Krausz repair products. Such geopolitical factors could lead to ongoing or additional supply chain and operational challenges, affecting both revenue and margins.
  
• The decommissioning of the legacy brass foundry, while planned to improve margins in the longer term, could incur unforeseen costs during the decommissioning process, potentially impacting net income in the interim.
  
• The uncertain external economic environment, including inflation, interest rates, and policy changes, could affect end-market demand and lead to volatility in revenue growth forecasts, impacting overall financial performance adversely.

Valuation

• The analysts have a consensus price target of $29.167 for Mueller Water Products based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $275.7 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 7.4%.
• Given the current share price of $27.75, the analyst price target of $29.17 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.