Innovating In Smart Water Solutions Elevates Revenue And Market Prospects Amid Challenges

Key Takeaways

• The company's successful revenue growth and high operating margins hint at robust market demand and operational efficiency, signaling potential for further earnings increases.
  
• Expansion into technology-driven products, like cellular AMI, and new sectors through products like BlueEdge, suggests solid opportunities for innovation-driven growth and market diversification.
  
• Dependency on uncertain backlog conversions, inflationary pressures, direct sales reliance, and increased SEA expenses could hamper profitability and revenue growth stability.

Catalysts

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

• Surpassing the $200 million quarterly revenue milestone with 23% year-over-year growth, driven by ongoing market demand and incremental backlog conversion, suggests potential for future revenue growth as market demand for their products remains robust.
  
• Record operating margins and EPS indicate operational efficiency and profitability, potentially leading to increased earnings as operational improvements and efficiencies are further realized and expanded upon.
  
• Strong cellular Automated Meter Infrastructure (AMI) demand and sales growth, particularly in the utility smart water solutions, signals continuing growth opportunities in technology-driven products, likely enhancing revenue and market share in growing tech-centric sectors.
  
• Expansion in the flow instrumentation product line and solid global order trends within water-related markets hint at diversification and penetration into new markets, potentially leading to revenue growth across varied sectors.
  
• Introduction of BlueEdge, a suite of solutions aimed at water management, indicates innovation and expansion into new product lines and services, likely to open new revenue streams and reinforce customer retention and attraction, enhancing long-term growth prospects.

Assumptions

• Analysts are assuming Badger Meter's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.4% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $161.1 million (and earnings per share of $5.43) by about October 2027, up from $112.9 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 46.1x on those 2027 earnings, down from 57.9x today. This future PE is greater than the current PE for the US Electronic industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Risks

• Uncertainty in backlog conversion rates moving forward could impact future revenue growth and possibly earnings as the company has already benefited from substantial backlog conversion.
  
• Ongoing inflationary pressures, including the rise in copper prices, might squeeze gross margins despite recent stability, affecting profitability.
  
• The reliance on direct sales and project schedules with utilities introduces variability in revenue, potentially making earnings more uneven and unpredictable.
  
• Increased SEA (Selling, Engineering, and Administrative) expenses, driven by higher headcount and R&D investments, could outpace revenue growth, impacting operating margins.
  
• Potential volatility in global order trends, especially with a noted moderation in the utility water product line's growth, could affect the company's ability to sustain high revenue growth rates, influencing net margins and earnings.

Valuation

• The analysts have a consensus price target of $209.6 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 $235.0, and the most bearish reporting a price target of just $184.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $161.1 million, and it would be trading on a PE ratio of 46.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of $222.06, the analyst's price target of $209.6 is 5.9% lower. 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.