Can Badger Meter Sustain the Rally After Rising 40% Year to Date?

Badger Meter BMI, a leading provider of water solutions, including flow measurement, quality and other system parameters, has delivered an impressive stock price appreciation of 39.8% year to date. This rally has outpaced the S&P 500 composite and the sub-industry’s 25.7% and 9.2% growth, respectively.Investors may question whether this rally leaves room for further upside or if the stock has reached its peak. Let us dive into BMI’s prospects and determine your portfolio's best course of action. YTD Price PerformanceImage Source: Zacks Investment ResearchRobust Demand Driving BMI’s Top LineDemand for digital smart water solutions has been increasing attributed to secular challenges in the water industry. This is driving strong adoption of BMI’s differentiated smart water solutions, including higher uptake of meters (both mechanical and E-Series Ultrasonic), ORION Cellular endpoints and associated BEACON Software-as-a-Service (SaaS) revenues. SaaS revenues rose about 35% in the third quarter, driven by growing customer dependence on insights and analytics from BEACON digital solutions. Various favorable macroeconomic drivers for the water industry growth, along with a strong opportunity funnel, bid pipeline, order book rates and increasing SaaS revenues, bode well for the long term. In May 2024, the company introduced the BlueEdge framework to streamline its comprehensive suite of scalable water solutions. In the third quarter, utility water sales rose 14% due to continued robust adoption across the BlueEdge suite of solutions by utility customers. Blue Edge can be customized to address applications for the entire water cycle and will also serve as a “strategic lens” for the company to assess growth investments.Badger Meter is continuously prioritizing and enhancing its presence in selected regional markets outside the United States that offer healthy growth potential. The company is likely to benefit by expanding its market share in water-related applications.BMI’s Improving ProfitabilityA favorable sales mix and selling, engineering and administration (“SEA”) expense leverage are driving margin performance. In the third quarter, gross profit was $83.9 million, up 15.3% year over year. The gross margin was 40.2%, up 110 basis points year over year. SEA leverage improved 20.8% compared with 22.2% in the prior-year quarter.BMI’s Sufficient LiquidityA debt-free balance sheet is another positive. As of Sept. 30, 2024, Badger Meter had $259 million in cash and cash equivalents with no long-term debt. In third-quarter 2024, the company reported a record quarterly free cash flow of $42 million compared with $28.4 million a year ago, indicating improved earnings and working capital management. Badger Meter is likely to benefit from a strong cash position driven by solid earnings conversion. It intends to utilize the cash flow to reinvest in the business, both organically through R&D (research and development) and via strategic tuck-in acquisitions.BMI Is a Dividend AristocratIn August 2024, Badger Meter announced a 26% hike in its quarterly dividend to 34 cents per share. The new annual dividend for common stock now is $1.36 per share. The hike marks 32 successive years of dividend increases. Its dividend payout ratio is 0.34.Challenges Lie Ahead for BMIFlow instrumentation product sales are being affected by declines in certain de-emphasized applications across the globe.Management noted that hurricane recovery activity might delay some Southeast U.S. utility projects in the near term.  This introduces an element of uncertainty for BMI. Although BMI added that it is too early to quantify the impact, this unpredictability may raise concerns about the company’s ability to deliver steady growth in the short term.BMI expects fewer customer operating days in the fourth quarter due to the holiday season, which could lead to reduced sales growth. Moreover, driven by tougher year-over-year comparison as well as strong but normalizing demand trends, BMI noted that it now expects to deliver high single-digit sales growth rates going ahead.Increasing expenses remain an additional headwind. In the third quarter of 2024, SEA expenses were $43.3 million compared with $41.3 million in the prior-year quarter. This increase in expenses was due to higher personnel costs, including higher headcount and salaries. Higher operating expenses could squeeze margins especially if the cost increases are not offset by corresponding revenue growth.BMI’s Expensive Valuation Keep Us WaryFrom a valuation perspective, BMI is trading at a relatively expensive level. Going by its forward 12-month price-to-earnings ratio, Badger Meter is trading at a multiple of 46.59, compared with the industry’s ratio of 19.72.Image Source: Zacks Investment ResearchWhat Should Investors Do?While Badger Meter stands to gain from secular growth drivers in the water industry, several factors could put pressure on its performance. These factors include moderating revenue growth, hurricane-related delays and rising operating costs amid a volatile macroeconomic backdrop.Consequently, it might not be a prudent investment decision to bet on the stock at the moment. However, long-term stakeholders and investors already owning the stock can stay put.At present, BMI carries a Zacks #3 (Hold).Stocks to ConsiderSome better-ranked stocks from the broader technology space are Plexus Corp., Inc. PLXS, Workday Inc. WDAY and InterDigital, Inc. IDCC. IDCC & PLXS presently sport a Zacks Rank #1 (Strong Buy), whereas WDAY carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.The Zacks Consensus Estimate for PLXS’ fiscal 2025 EPS is pegged at $6.79, unchanged in the past seven days. PLXS’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, while missing once, with the average surprise being 10.3%. Its shares have increased 60% in the past year.The Zacks Consensus Estimate for IDCC’s 2024 earnings is pegged at $15.22, up 12.5% in the past seven days. IDCC’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, with the average surprise being 163.7%. Its shares have surged 95.9% in the past year.The Zacks Consensus Estimate for WDAY’s fiscal 2025 EPS is pegged at $6.97, unchanged in the past 30 days. WDAY’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, with the average surprise being 9.1%. The stock has risen 2.9% in the past year.7 Best Stocks for the Next 30 DaysJust released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."Since 1988, the full list has beaten the market more than 2X over with an average gain of +24.1% per year. So be sure to give these hand picked 7 your immediate attention. See them now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Badger Meter, Inc. (BMI): Free Stock Analysis Report Plexus Corp. (PLXS): Free Stock Analysis Report InterDigital, Inc. (IDCC): Free Stock Analysis Report Workday, Inc. (WDAY): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks