SmartCover Acquisition And AMI Integration Will Expand Offerings

Key Takeaways

• Strategic acquisition and strong AMI adoption drive growth through expanded customer offerings, cross-selling, and improved revenue potential.
  
• Debt-free status and strong cash flow enable strategic investments in growth, enhancing earnings and shareholder value amidst economic uncertainties.
  
• Increasing tariffs and geopolitical risks, coupled with higher input costs and SEA expenses, threaten Badger Meter's margins and revenue growth amidst fluctuating demand.

Catalysts

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

• The acquisition of SmartCover is expected to drive sales and operating synergies, particularly benefiting revenue through expanded customer offerings and cross-selling opportunities.
  
• Continued strong adoption of cellular Advanced Metering Infrastructure (AMI) and associated technologies like ORION cellular endpoints and BEACON software suggest ongoing revenue growth potential as infrastructure investments continue.
  
• Recent pricing offsets to manage potential tariff impacts are expected to mitigate costs, helping to maintain or improve net margins despite global economic uncertainties.
  
• Structural sales mix improvements, particularly from high-margin software solutions, are providing favorable impacts on gross and operating margins, suggesting potential for sustained earnings growth.
  
• The company's debt-free balance sheet and strong free cash flow generation enable strategic investments in organic and inorganic growth opportunities, potentially enhancing earnings and shareholder value over time.

Badger Meter Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Badger Meter's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.7% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $188.4 million (and earnings per share of $6.37) by about April 2028, up from $134.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.3x on those 2028 earnings, down from 45.8x today. This future PE is greater than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Badger Meter Future Earnings Per Share Growth

Risks

• The evolving tariff situation and potential for increased input costs due to import tariffs on electronics and components from China, Southeast Asia, and Israel, as well as export controls from China on rare elements like bismuth, could influence gross margins and may necessitate price increases that could impact customer demand.
  
• The reliance on existing manufacturing structures like the facility in Nogales, Mexico may expose the company to geopolitical risks, such as changes in the USMCA agreement, impacting cost structures and potentially net margins.
  
• While some input costs like bismuth have seen a significant increase, the ability to pass on costs to customers is not immediate—this time lag in implementation of pricing strategies could temporarily affect gross margins negatively.
  
• The decrease in sales in the flow instrumentation product lines due to reduced demand in certain market applications could have a negative impact on revenue growth if this trend continues or worsens.
  
• SEA expenses have increased, in part due to the SmartCover acquisition, which if not offset by expected sales and synergy benefits, might pressure operating margins and overall profitability.

Valuation

• The analysts have a consensus price target of $222.731 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 $252.0, 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 $188.4 million, and it would be trading on a PE ratio of 42.3x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $208.53, the analyst price target of $222.73 is 6.4% 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.