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Badger Meter Upgraded to Neutral

Zacks Equity Research

On Oct 7, we upgraded our recommendation on liquid flow measurement products and control technologies provider Badger Meter Inc. (BMI) to Neutral. Our view reflects improved volumes, Aquacue acquisition and product launches. However, subdued growth for automation sales, higher operating costs and global economic weakness remain headwinds.

Why the Upgrade?

Badger Meter, on Jul 18, reported net sales of $88 million for the second quarter of 2013, up 7.8% year over year, mainly on higher sales of municipal water as well as industrial flow products. The results were ahead of the Zacks Consensus Estimate of $87 million. However, earnings per share declined 15.4% year over year to 44 cents due to litigation and pension charges and missed the Zacks Consensus Estimate of 55 cents.

Badger Meter, a Zacks Rank #3 (Hold) stock, raised its quarterly dividend by 5.9% to 18 cents per share in Aug 2013. This represents the 21st consecutive hike in its dividend. The hike demonstrates Badger Meter’s continued focus on healthy free cash flow generation and shareholder returns.

Results in the second half are expected to be better than the first due to benefits of acquisition, product launches and upbeat global energy demand. The company’s acquisition of Aquacue, in Apr 2013, is expected to enhance product offerings by integrating operations and technology.

Badger Meter also released an updated version of ReadCenter Analytics software, which allows municipal water utilities to gather significant amounts of metering data and perform detailed analysis to improve their operations and customer service. In addition, AMR/AMI expansion will also drive growth in the near term that should enhance Badger Meter’s sales and earnings prospects.

However, Badger Meter’s operating costs are expected to be higher due to added headcount in key areas. Commodity costs, in particular brass and copper-based materials, constitute a significant portion of Badger Meter’s costs. If costs rise and the company is unable to pass on the raw material price increase, margins will be affected.

Moreover, higher construction costs, labor shortage, lack of funds for real estate projects and adverse effects of sequestration are likely to remain headwinds for the construction sector. This, in turn may affect Badger Meter’s sales.

Other Stocks to Consider

Among the other stocks in the same sector, Thermon Group Holdings, Inc. (THR), Cognex Corp. (CGNX) and Mettler-Toledo International Inc. (MTD) look favorably placed with a Zacks Rank #2 (Buy).

Read the Full Research Report on BMI
Read the Full Research Report on CGNX
Read the Full Research Report on THR
Read the Full Research Report on MTD

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