Badger Meter, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 5/5

Badger Meter, Inc. is a leading manufacturer and marketer of products incorporating flow measurement, control, and water systems.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Badger Meter, Inc. operates as a global provider of industry-leading water management solutions, catering to diverse needs in water conservation, measurement, quality and flow. Here’s a breakdown of its business:

  • Product Portfolio: The company’s main focus lies in two key product lines: water meters and related technologies, and flow instrumentation. The water solutions include ultrasonic meters, electromagnetic meters, mechanical meters, and related equipment and technologies. The flow instrumentation products primarily measure liquids, gases and other substances, and include technologies such as mechanical, thermal, and vortex meters.

  • Target Markets: BMI serves various industries, primarily including municipal water utilities, commercial and industrial markets, and public water systems. This diversity means a broad customer base that provides recurring revenues.

  • Geographic Presence: Badger Meter operates both within North America and internationally, with a significant presence in North America. They’re strategically growing their presence in Europe and Asia. They also benefit from diversification, where sales in one market compensate lower sales in other markets.

  • While a significant portion of their revenue comes from the US, international sales are increasingly becoming significant.

  • Technological Innovation: The company emphasizes the use of advanced technology in product development, including ultrasonic sensing, digital communication, data analysis, and software solutions. This indicates their commitment to staying on the cutting edge of their industry.

Competitive Landscape and Moat Assessment

While Badger Meter doesn’t have a clear cut wide moat, the company benefits from several competitive advantages that we will give a moat rating of 3 / 5

  • Specialized Technology: BMI’s focus on specialized technology, including advanced sensing and data analysis software, provides a differentiated product offering that is difficult for smaller competitors to quickly replicate. This is particularly important as more governments are looking for efficient water management solutions.

  • Established Brand and Reliability: As a supplier for critical water and flow systems, customers look for reliability, which is a big advantage that well-established companies like Badger Meter have. Their long-standing presence in the industry gives them trust and credibility, which new entrants would have to build over time.

  • Switching Costs: When customers already have a complex system installed by Badger Meter, it is hard to switch to other vendors. They are locked in due to software, process and training involved in a switch.

  • Niche Markets: BMI also benefits from high-value niche markets, such as high-end industrial pumps and water flow management which have higher returns than other industries.

  • Barriers to Entry: The high regulatory hurdles and the technical capabilities required in the water management sector create an environment where it’s hard for new companies to quickly compete with the incumbents.

  • However, there is a higher risk of government regulation changes that might affect the business profitability. The business is also susceptible to new technologies and disruptive ideas that may render their current technologies obsolete and redundant in the future. Also, larger and more technologically advanced companies may also pose a threat in the future.

Financial Analysis

  • Revenue Growth: The company has displayed solid revenue growth in 2022, driven by a strong demand for its new products, particularly its ultrasonic meters, coupled with favorable government regulation. In Q3 2023, there was a rise in sales of 14.8% compared to the same period last year. This indicates a solid, high-growth company.

  • Profit Margins: Badger Meter has decent, industry standard profit margins. With strong revenue growth combined with increased operating margins, this should reflect positively on the future earning power of the company. Gross margins came in at 39.5% for the recent quarter of 2023.

  • Capital Allocation: The management has a balanced approach toward capital allocation. A portion of the profits is used for growth and acquisitions. The company also pays a steadily growing dividend to reward investors, a sign of healthy growth.

  • Cashflow: Badger Meter consistently generates strong operating cash flows, which are well above their capital expenditures. As a result, the company has a substantial amount of cash and cash equivalents on its balance sheet. In the most recent earnings call, it was emphasized that the management was targeting a higher cash-to-revenue ratio in the near future.

  • Balance Sheet Health: The company’s balance sheet is excellent with almost no debt. The company is well positioned to tackle future challenges. This solid financial positioning allows for the company to be more flexible in the case of an economic downturn and to make more acquisitions. We will give a 5 / 5 for the balance sheet health of the company.

  • Badger Meter has a pristine balance sheet. This is one of the best features of the business, and it should bode well for investors.

Understandability

The company’s business model is not complicated, but there are some aspects that require some digging. Overall, we give it an understandability of 3 / 5

Recent Developments

  • Acquisition of Analytical Technology, Inc (ATI): Recently, Badger Meter announced the acquisition of ATI for $64.9 million. This will be a bolt-on acquisition that the company will expect to be profitable and will grow its revenue. ATI produces online water quality monitoring systems which will be integrated into the BEACON platform of Badger Meter.
  • This transaction was not explicitly baked into our estimates, and could possibly have a positive influence on value creation.
  • Supply Chain Issues: While management acknowledges the continued disruption in supply chains, they stated that the situation has improved as compared to the previous periods, and have not affected the earnings of the company.
  • Inflationary Pressures: The company has noted inflationary pressures, which it has passed on in terms of price hikes. The margins of the company, therefore, have remained unaffected.
  • The management seems to be working hard to integrate acquisitions and are looking to reduce costs, as highlighted in the 2022 and Q3 2023 Earnings calls.
  • Lawsuit: In 2020, the company was awarded 15 million dollars in a lawsuit for a patent infringement case. In the latest earnings call, the management has stated that they were able to recover the full amount of legal expenses, but has not provided any updates on the recovery of funds for damages.

Risks and Resilience

  • Technological Disruption: As a technology focused firm, one of the biggest risks is technological disruption. Should other competitors make more efficient water management solutions using different technologies, Badger Meter’s moat would become weak.
  • Industry Consolidation: As companies merge, smaller companies might get pushed out due to scale issues. Badger Meter, despite having significant revenue, could find itself at a disadvantage as the major players in the industry consolidate.
  • Dependence on Key Customers: The company could have to offer lower prices to keep its large customers and those long-term relationships.
  • The government is both a large customer, and also the regulatory body that the company answers to, so policy changes may adversely affect the business.
  • Economic Downturn: Since water is largely non-cyclical, a bad economic downturn could still affect industrial clients which form a decent percentage of revenues. This can lead to lower sales.
  • Cybersecurity: Given that the company is increasingly reliant on its digital operations, an event that leads to its systems being shut down may disrupt normal operations.
  • However, Badger Meter seems to be resilient, as it is an essential service provider. Additionally, as the importance of water management grows, the company has great potential to grow in the future.

Conclusion

Badger Meter is a well managed company with a long history of consistent profitability. The company seems to have a decent moat and a pristine balance sheet. The company’s growth in the long term looks bright and it should generate good returns for the investors going forward.