Why Is Badger Meter (BMI) Down 1.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Badger Meter (BMI). Shares have lost about 1.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Badger Meter due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Badger Meter Q1 Earnings Beat Estimates, Revenues Up

Badger Meter reported impressive first-quarter 2020 results, with net earnings and revenues increasing year over year.

Net Income

Quarterly net earnings for the reported quarter were $11.9 million or 41 cents per share compared with $10.8 million or 37 cents per share in the year-ago quarter. The year-over-year improvement in the bottom line can be primarily attributed to higher revenues. The bottom line surpassed the Zacks Consensus Estimate by a penny.

Revenues

Despite the worldwide mayhem caused by the coronavirus outbreak, net sales increased to $108.5 million from $104.9 million in the year-ago quarter. The upside was driven by a favorable mix of high-end products and services coupled with higher BEACON service revenues and robust sales performance of mechanical meters. The top line met the consensus estimate of $109 million.

Municipal water sales were up 6%, primarily on robust demand for smart metering solutions like ORION LTE-M and E-Series commercial meters. Flow instrumentation declined 4% due to a sluggish demand for industrial products, particularly in international markets in the aftermath of COVID-19 outbreak. The oil and gas market witnessed a significant slowdown in the reported quarter, which was partially offset by higher HVAC (heating, ventilation and air conditioning) revenues.

Other Details

Gross profit was $43.3 million, up 7.1% from $40.5 million in the year-earlier quarter. First-quarter gross margin was 39.9%, primarily driven by favorable sales mix and lower commodity costs coupled with moderating price as well as cost dynamics. Operating earnings were $16 million or 14.8% of sales compared with respective tallies of $14.3 million and 13.7% in the year-earlier quarter.

Selling, engineering and administration expenses came in at $27.3 million compared with $26.1 million in the prior-year quarter, which was primarily caused by increased personnel and higher R&D expenditures.

Cash Flow & Liquidity

During the quarter, Badger Meter generated $30.5 million of net cash from operations compared with $17.8 million in the prior-year quarter, driven by strong earnings conversion. Free cash flow came in at $28.6 million, up 82.2% from the prior-year quarter’s figure. The year-over-year rise was primarily driven by efficient working capital management. As of Mar 31, the company had $70.4 million in cash and equivalents with $4.4 million of short-term debt.

Moving Forward

With the overall activity in end markets slowing down amid COVID-19 pandemic, Badger Meter’s near-term outlook is murky. Factors like cargo capacity constraints and supply chain disruptions are expected to dent profitability over the next few months. However, the Milwaukee, WI-based controls products manufacturer has undertaken temporary cost-saving initiatives to ensure smooth functioning of its business operations. Markedly, the company reduced its work schedule to 32 hours, four days a week. To avoid laying off employees, company executives have incurred a 20% pay reduction. Moreover, with discretionary spend controls, Badger Meter continues to deliver critical products and services to customers to during this hour of crisis.

Nevertheless, Badger Meter is well positioned to emerge from this unprecedented calamity owing to robust liquidity position and strong bid pipeline. With a revolving credit facility of $125 million, the company is confident about rewarding its shareholders with quarterly dividend payouts. Customer demand is anticipated to be the crux of product and technology roadmap, with positive municipal spending trends as well as competitive share and positioning. The company is focused on launching new products in 2020. Continued R&D investments and probable M&A opportunities with inventory and operations planning capabilities are likely to provide potential technology extensions as well as opportunities in the future.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -7.69% due to these changes.

VGM Scores

At this time, Badger Meter has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Badger Meter has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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