Mueller Industries

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Mueller Industries is a global manufacturer of copper, brass, aluminum, and plastic products, primarily focusing on piping systems, industrial metals, and climate segments.

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

Mueller Industries is a global manufacturer known for its diverse product line, encompassing copper, brass, aluminum, and plastic goods. The company operates through three main segments: Piping Systems, Industrial Metals, and Climate segments.

  • Piping Systems: This segment is the cornerstone of Mueller Industries, involved in manufacturing copper tubes, plastic pipes, and related fittings used in various piping systems. These products are primarily distributed within the U.S. and Canada, serving construction, infrastructure, and plumbing markets.
  • Industrial Metals: The Industrial Metals segment, composed of Mueller Brass, Impact & Metal Alloys, Precision Tube, and Tridan companies, manufactures brass and copper alloy products, including rods, bars, forgings, and aluminum impacts. These products are used across industries such as automotive, transportation, and more.
  • Climate: This segment, consisting of Westermeyer Industries, Wolverine Tube, and A/C Components, manufactures parts for HVAC and refrigeration, including heat exchangers and HVAC manifolds. These products are primarily sold in North America.

The geographical breakdown reveals that the majority of the company’s revenue comes from North America. However, Mueller also maintains a presence in other regions, including Mexico, the Middle East, Europe, and China.

  • Infrastructure Development and Renovation: The demand for piping products is supported by the ongoing need for infrastructure repair and development in the U.S. and Canada.
  • Shift Toward Sustainable Solutions: The pressure to lower the carbon footprint might influence growth for plastic pipes that could substitute metal pipes.
  • Growth in HVAC and Energy Markets: The increasing demand for energy-efficient heating, ventilation, and air conditioning systems will likely lead to increased need for the components manufactured by the Climate segment.
  • Supply Chain Volatility: The industry is sensitive to the prices of copper and other raw materials, as well as trade dynamics and globalization.
  • Economic Conditions: The industries that they service including residential, commercial, and industrial construction are sensitive to changes in economic conditions.

Competitive Landscape

  • Highly Competitive: Mueller Industries operates in competitive markets with several global and regional competitors.
  • Price Sensitivity: Many of the markets they cater to, including building supplies and industrial products are very sensitive to price.
  • Localized Competition: In each region, they face competition for market share against smaller players, so geographic position is important.
  • Emphasis on Technology and Innovation: Competitiveness is increased by the need to develop innovative products, which requires continued investment in research and development.

Financial Analysis

Income Statement

  • Revenue Growth: From 2021 to 2022, there has been a revenue growth of 6.1%, and 14.6% from 2020 to 2021. This shows the company has continued to increase the sales of their product.
  • Cost of Goods Sold: COGS has increased significantly, but at a lower rate than revenue has increased. As a percentage of revenues COGS is 72.6% for 2022, 73.2% for 2021 and 78.4% for 2020. This shows an improving gross profit.
  • Operating Expenses: Although COGS has improved the operating expenses have seen very little change between 2020 and 2022.
  • Net Income: Net income has decreased from 479 million in 2021 to 363.7 million in 2022, this is because of the increase in cost of goods sold and operating expenses. This shows that the increasing revenues have not lead to significantly higher profits due to increases in their expenses.
  • Earnings Per Share: With weighted average shares outstanding being about 61 million over the last few years, the adjusted diluted earnings per share have decreased from 7.37 in 2021 to 5.96 in 2022. This is consistent with what we saw in net income.

While the revenues have increased, the net income and diluted EPS have decreased in 2022 compared to 2021 due to increases in COGS and operating expenses.

Balance Sheet Health

  • Cash and Equivalents: Company has roughly 1.3 to 1.6 billion in cash and cash equivalents. This level of liquidity reduces financial risk of the company.
  • Working Capital: Working capital is also looking good, it is currently 1.3 billion.
  • Debt: the company’s total debt is 382 million, which is very conservative.
  • Equity: Total equity is 1.82 billion, with retained earnings making up a substantial portion of it.
  • Capitalization: The company is capitalized mostly by equity as a large portion of its total liabilities and equity is made up of equity.

These indicate a fairly healthy balance sheet, with low debt, large cash position, and healthy level of equity.

Moat Assessment 3 / 5

While Mueller Industries has several advantages, it is not without risks. Let’s break down what would be considered a “moat”, and what it is currently lacking.

  • Brand Recognition: While the company does have recognizable brands within its business units, these brands do not give strong pricing power. Therefore, it is more of a narrow moat.
  • Switching Costs: Switching costs are significant for customers that are invested in their equipment, tooling and manufacturing process, therefore these customers are unlikely to switch without a clear benefit. Thus, they provide a narrow moat, especially for the Piping and Industrial Segments.
  • Economies of Scale: Their manufacturing and distribution has a scale that makes it tough for others to compete. Even though, this creates a good advantage, it is not an insurmountable one, since it is replicable, giving it a narrow moat.

Based on the above points, the company is given a narrow moat rating, because though there are some durable competitive advantages, they are still not extremely strong and are easy to replicate by well-funded competitors.

Risks to Moat and Business Resilience

  • Commodity price volatility: Copper, aluminum and other raw material prices can fluctuate and make profitability volatile.
  • Competition: The company’s markets are competitive, resulting in significant price pressures.
  • Supply Chain Disruptions: The industry might be sensitive to shortages of some material and delays.
  • Acquisition integration challenges: The company’s growth strategy is based on acquisitions, they have to integrate the company well for them to be beneficial.
  • Cyclical Industries: The industries it operates in, such as construction and automobile are cyclical, meaning in a recession its revenue might take a big hit.

Despite these risks, Mueller has a few aspects that can help it remain resilient. The diversified product portfolio, with exposure across numerous industries, reduces exposure to a single market. Its strong financial position, including low debt and high liquidity, provides a good buffer against financial turmoil. The company’s ability to integrate acquisitions effectively could give it a boost.

Understandability Rating 4 / 5

The business is not particularly easy to understand, because of its several operating segments which manufacture many different products, that are then sold to other companies. However, understanding what each division is doing separately, while following the flow of their products and services, as well as the basics of business is not terribly hard either, thus making it a 4/5.

Recent Concerns

  • The company is having some issues with profitability, with their net income decreasing from the 2021-2022 period, because of increased expenses.
  • They acknowledged that there are certain factors which they don’t have any influence over, that affect their performance (such as raw materials and energy prices, supply disruptions). They are mainly focusing on controlling the things that they can control, such as having lean operations and focusing on value-adding strategies.
  • They have been acquiring some businesses to strengthen their hold in the market, and have been working on restructuring. These acquisitions and restructuring might give them a boost in the future.
  • The company is looking to balance growth with maintaining profitability in this new economic environment, which might slow growth.

Despite these factors, the management seems confident in the company’s ability to tackle the oncoming challenges and still remain profitable in the long-term.