BMI $42.09
Market Cap $632
Net Debt $10
EV $642
FYE: Dec FY06 FY07 FY08 FY09 FY10 E FY11 E FY12 E
Net Income $17 $18 $24 $26 $28 $32 $37
EPS $1.15 $1.26 $1.65 $1.75 $1.88 $2.15 $2.45
EPS growth 9% 31% 6% 8% 14% 14%
PE 33.5x 25.5x 24.1x 22.4x 19.6x 17.2x
EBITDA ($M) $36 $37 $47 $51 $54 $61 $69
EBITDA Growth 4% 27% 8% 7% 13% 12%
EBITDA per share $2.49 $2.54 $3.16 $3.39 $3.60 $4.05 $4.54
EV / EBITDA 17.9x 17.3x 13.7x 12.7x 11.9x 10.5x 9.4x
CAPEX ($M) ($11) ($16) ($13) ($8) ($9) ($10) ($10)
EV / EBITDA less Capex 26.0x 30.4x 19.0x 15.0x 14.3x 12.5x 10.9x
Price Target $48
PT Multiples FY06 FY07 FY08 FY09 FY10 E FY11 E FY12 E
P/E 41.7x 38.2x 29.1x 27.5x 25.6x 22.4x 19.6x
EV / EBITDA 20.4x 19.7x 15.6x 14.4x 13.5x 12.0x 10.7x
n Strong 3Q10 Results: GAAP EPS $0.60 included $0.05 in previously unrecognized
tax benefits. Excluding the tax benefit, adjusted EPS was $0.55, in line with our
estimate and ahead of $0.51 consensus. Excluding the tax benefit, EPS increased
~30% Y/Y.
n Record Quarterly Sales: Net sales grew 25% Y/Y (2% Q/Q) to $75.7M, above our
estimate of $75.0M and $71.9M consensus, driven by follow-through order strength
and shipments following stimulus funding resolution in February, which resulted in
significant improvement in orders beginning in March and continuing through the
summer months. Sales increased in most product lines, lead by AMR and AMI
Water product lines. Water sales (83.7% of mix) increased 16.5% to $63.6M with
Orion sales increasing 18.4%, Itron (ITRI - $60.69 – Buy) increasing 25.5% and
manual read meters increasing 10.6%. Sales of Commercial water meters were
relatively flat on a year-over-year basis. The Fresno project contributed to the
quarter as the project is now in full swing. BMI did not win the Cleveland water
AMI contract, but did express optimism that it may still be a meter supplier to the
project.
n Specialty Sales Benefit From Duke Contract and Other Municipal Gas Utilities:
Specialty products increased 92% to $12.3M from $6.4M in 3Q09 with significant
contribution to the year-on-year improvement from the Cox acquisition (~$1.4M or
similar to 2Q10 contribution). While the Duke (DUK – $17.79 – No Rating) contract
contributed to the sales growth, BMI has shipped radios for gas meters at ~60 small
municipal gas utilities. BMI is seeing modest (double-digit) improvement in
Specialty products that were hit the hardest during the recession (~down 25%-30%),
and expects to see further improvement tied to the cyclical recovery in these higher-
margin products.
n Gross Margins Increased Q/Q: Gross margin contracted 210bp Y/Y but expanded
50bp Q/Q to 36.9% and was approximately in line with our 37.0% estimate. We
believe sequential margin expansion was supported by a combination of price
increases from earlier this year, a decrease in 2Q10 copper prices vs. 1Q10 of
~$0.50, the strengthening of the USD in 1H10 and the ongoing production shift to a
lower cost facility in Mexico. BMI noted that if commodity prices remain high, then
a price increase could be implemented in early 2011. EBIT margin expanded 20bp
Y/Y and 120bp Q/Q to 17.7%.
n Cash Balance Decreases Due to Pension & Investments: Ending cash balance of
$2.7M was roughly flat vs. 2Q10 due to a $4.7M unplanned pension contribution and
$8.0M to acquire a license for the manufacture and sale of a key component in
BMI’s turbine meters. Badger finished 3Q10 with ~$10M in net debt, up from net
zero debt at the end of 2Q10.
Page 2
BADGER METER INC. (NYSE: BMI) October 21, 2010
DEC: FYE 2005 2006 % Chge 2007 % Chge 2008 % Chge 2009 % Chge 2010E % Chge 2011E % Chge 2012E % Chge
Net Sales ($M) 204 230 13% 235 2% 280 19% 250 -10% 279 11% 309 11% 340 10%
Cost of Sales 130 153 18% 153 0% 182 19% 153 -16% 176 15% 196 11% 216 10%
Gross Profit 73 77 4% 81 6% $97 20% $97 0% $103 6% $113 10% $124 10%
Gross Profit Margin 36.1% 33.4% 34.7% 34.9% 38.8% 36.8% 36.6% 36.6%
Net Income $13 $8 -43% $16 118% $22 33% $27 24% $28 4% $32 15% $37 15%
EPS - Continuing Ops $1.15 $1.15 0% $1.26 9% $1.65 31% $1.75 6% $1.88 8% $2.15 14% $2.45 14%
EPS - Reported $0.95 $0.52 -44% $1.13 115% $1.48 31% $1.82 23% $1.88 3% $2.15 14% $2.45 14%
Page 3
BADGER METER INC. (NYSE: BMI) October 21, 2010
DEC: FYE 1Q10 1Q09 % Chge 2Q10 2Q09 % Chge 3Q10 3Q09 % Chge 4Q10E 4Q09 % Chge 2010E 2009 % Chge
Water 53 59 -10% 65 61 6% 64 54 17% 57 50 14% 212 224 -5%
Specialty 9 6 39% 10 7 40% 12 6 92% 10 7 60% 36 26 38%
Net Sales ($M) 62 65 -5% 74 68 10% 76 61 24% 67 56 19% 279 250 11%
Interest Expense (Income) 0.1 0.4 0.1 0.3 0.1 0.2 0.1 0.2 0.4 1.1
Pre-Tax Income 9 11 -22% 12 12 -2% 13 10 27% 10 7 41% 44 41 8%
Income Tax Provision (Benefit) 3 4 5 5 4 4 4 2 16 15
Tax Rate (%) 38.1% 37.0% 37.8% 37.2% 32.4% 40.3% 39.2% 30.2% 36.5% 36.7%
Net Income From Continuing Ops 5 7 -23% 8 8 -2% 9 6 44% 6 5 23% 28 26 8%
Discont Ops, net of taxes 0 0 0 0 0 1 0 0 0 1
Net Income 5 7 8 8 9 7 6 5 28 27
EPS - Continuing Ops / Adj. $0.36 $0.47 -24% $0.50 $0.52 -3% $0.60 $0.42 44% $0.42 $0.34 23% $1.88 $1.75 8%
EPS - Reported $0.36 $0.47 -24% $0.50 $0.52 -3% $0.60 $0.49 22% $0.42 $0.34 23% $1.88 $1.82 3%
1Q11E 1Q10 % Chge 2Q11E 2Q10 % Chge 3Q11E 3Q10 % Chge 4Q11E 4Q10E % Chge 2011E 2010E % Chge
Water 54.4 52.9 2.8% 64.7 64.8 -0.1% 59.8 63.6 -6.0% 49.4 56.9 -13.1% 228 212 7.7%
Specialty 10.0 8.9 12.5% 10.4 9.5 9.9% 10.1 12.3 -18.2% 8.5 10.4 -18.6% 39 36 8.1%
Net Sales ($M) 71 62 15% 81 74 9% 83 76 10% 74 67 10% 309 279 11%
Cost of Sales 45 39 17% 51 47 9% 52 48 10% 47 43 10% 196 176 11%
Gross Profit 26 23 11% 30 27 10% 31 28 10% 27 24 10% 113 103 10%
Gross Profit Margin 36.5% 37.6% 36.6% 36.4% 36.9% 36.9% 36.4% 36.4% 36.6% 36.8%
Interest Expense (Income) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.4
Pre-Tax Income 10 9 14% 14 12 14% 15 13 16% 12 10 18% 51 44 15%
Income Tax Provision (Benefit) 4 3 5 5 6 4 4 4 19 16
Tax Rate (%) 37.0% 38.1% 37.0% 37.8% 37.0% 32.4% 37.0% 39.2% 37.0% 36.5%
Net Income From Continuing Ops 6 5 16% 9 8 15% 10 9 8% 8 6 22% 32 28 15%
Discont Ops, net of taxes 0 0 0 0 0 0 0 0 0 0
Net Income 6 5 9 8 10 9 8 6 32 28
EPS - Continuing Ops / Adj. $0.41 $0.36 16% $0.58 $0.50 15% $0.65 $0.60 8% $0.51 $0.42 22% $2.15 $1.88 14%
EPS - Reported $0.41 $0.36 16% $0.58 $0.50 15% $0.65 $0.60 8% $0.51 $0.42 22% $2.15 $1.88 14%
Page 4
BADGER METER INC. (NYSE: BMI) October 21, 2010
Page 5
BADGER METER INC. (NYSE: BMI) October 21, 2010
APPENDIX SECTION
Company Description: Badger Meter, Inc. is a leading manufacturer and marketer of flow measurement meters and control
products. Meter product applications include residential, commercial and industrial and Badger serves water utilities, municipalities
and other industrial customers.
IMPORTANT DISCLOSURES:
Price Target Risks & Related Risk Factors:
Risks to our investment thesis and the achievement of our price target include, but are not limited to, a company's failure to achieve
Sterne, Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect
demand for a company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or
industry; intense and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability
to recruit and retain competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could
affect the market price of a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities
Exchange Commission, or contact Mr. Robert Hoehn, Director of Research at Sterne, Agee & Leach, Inc., at 212-338-4731.
Valuation Methodology:
Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry
size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and
expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry
or company-specific occurrences. Sterne, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings
multiples, price-to-revenue multiples, and enterprise-value-to-revenue ratios. Sterne, Agee & Leach, Inc., believes this accurately
reflects the absolute value of earnings, the earnings growth rate, the inherent profitability, and adjusted balance sheet factors.
Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc., by contacting Mr. Robert
Hoehn, Director of Research at Sterne, Agee & Leach, Inc., at 212-338-4731.
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provided other investment banking services for the subject company.
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Ratings Distribution:
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EQUITY RESEARCH
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