Acquiring SmartCover Will Broaden BlueEdge Suite And Strengthen Future Outlook

Key Takeaways

• Enhanced product offerings and cross-selling from SmartCover acquisition are expected to boost revenues and profitability.
  
• Steady growth in software revenue and lower working capital intensity improve net margins and financial flexibility.
  
• Strategic acquisition of SmartCover could initially compress margins and dilute earnings, with profitability reliant on technology adoption and market conditions.

Catalysts

Manufactures and markets flow measurement, quality, control, and communication solutions worldwide.

• The acquisition of SmartCover is expected to enhance Badger Meter's BlueEdge suite by integrating sewer and lift station monitoring, which could lead to increased revenues due to broadened product offerings and cross-selling opportunities.
  
• The utility water product line continues to show strong growth driven by solid demand for smart water solutions, particularly the adoption of cellular AMI, which should positively impact future revenues and operating margins.
  
• Badger Meter's focus on leveraging their direct sales organization and enhancing product features and functionality with SmartCover's offerings could drive significant top-line growth and improve profitability margins in the long term.
  
• The steady growth of software revenue, which now represents a significant portion of total sales, suggests an ongoing shift towards higher-margin offerings that can improve overall net margins and earnings.
  
• The company has seen improvements in free cash flow generation due to reduced working capital intensity, which provides financial flexibility for further investments that could support future growth and potentially higher earnings per share.

Badger Meter Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Badger Meter's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.1% today to 16.4% in 3 years time.
• Analysts expect earnings to reach $182.8 million (and earnings per share of $6.19) by about April 2028, up from $124.9 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 44.1x on those 2028 earnings, up from 40.2x today. This future PE is greater than the current PE for the US Electronic industry at 18.3x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Badger Meter Future Earnings Per Share Growth

Risks

• The potential imposition of tariffs could increase costs and impact the company's profit margins and overall earnings.
  
• The acquisition of SmartCover, while strategic, introduces higher short-term SEA expenses and intangible asset amortization, which could compress net margins initially and be EPS dilutive in 2025.
  
• SmartCover's current EBITDA margins are lower than Badger Meter's core business; this disparity might suppress overall profitability if not improved over time.
  
• Interest income is expected to decline due to the cash purchase of SmartCover, which might lead to a reduction in net income.
  
• The reliance on the ongoing adoption of technology and macro drivers for the SmartCover acquisition could pose a risk if market conditions or customer demand change, potentially affecting future revenue growth.

Valuation

• The analysts have a consensus price target of $225.589 for Badger Meter 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 $255.0, and the most bearish reporting a price target of just $198.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $182.8 million, and it would be trading on a PE ratio of 44.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of $170.72, the analyst price target of $225.59 is 24.3% higher.
• 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.