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Berko: Mueller Water Products looks like good buy

By Malcolm Berko

Published: July 29, 2018, 6:02am

Dear Mr. Berko: My Morgan Stanley broker just recommended that I buy 800 shares of Mueller Water Products, which trades at $11.75. He insists it’s a good stock to hold for 10 years because the water facilities at most cities are poorly maintained and in serious need of upgrades. Could I have your thoughts?

— TC, Joliet, Ill.

Dear TC: You have beautiful handwriting. I’ll wager ducks to doubloons that lots of folks send you notes hoping you’ll respond, because a letter from you is a piece of art that’s awesome to look at. I suspect that there will be a place for your graphology on the walls of the Guggenheim.

Mueller Co. (MWA-$12) now headquartered in Atlanta, opened its first office in Decatur, Ill., in 1857 with annual revenues of $11,396, net profits of $783 and two employees. Last year, MWA, certainly the leading supplier of water infrastructure products, posted $826 million in revenues with 4,200 employees and $86 million in net profits. This year, management believes it will post $920 million in revenues and net profits of $101 million. In the next three years, the Street believes that MWA could generate $1.2 billion in revenues, with net profits of $140 million. And the consensus thinks MWA shares will range between $19 and $26 a share. Meanwhile, the dividend that has been rather stingy could improve from this year’s 20 cents a share to 36 cents a share.

This little-known company is a leading supplier of water infrastructure products and we know that the operation of most of our water systems relies upon aged technologies and outdated equipment. Experts tell us that approximately 79 percent of our nation’s water infrastructure needs must be replaced in the coming 15 years. This year and last, there have been a number of crises. Municipalities, such as Detroit, Modesto, Miami, El Paso, Dallas, Denver, are in trouble and will require replacement products such as fire hydrants, butterfly valves, iron gate valves, leak detection equipment, advanced meter reading, pipe condition assessment technology, plug valves, ball valves, brass water products and new, intelligent water technologies.

MWA went public in late 2006 at $16, rose to $19.75 and then dropped to $1.50 a share during the 2008 recession. It’s been a slow return. However, net profit margins have improved from 2.5 percent to 10 percent this year, with an expected 11 percent in 2019. And going a few years out, the consensus expects MWA to post net profit margins of 12.5 percent. Many observers think there’s momentum here. Since coming public in 2006, management has reduced long-term debt from $1.1 billion to $475 million with a safe 6.4 interest coverage ratio. And since coming public, MWA has enjoyed a three-fold return on capital of 10.1 percent and increased its return on equity five-fold to 17.5 percent. There are only 158 million shares outstanding and its current P/E ratio of 18.1 is lower than the industry average of about 25.

I admit that MWA is about as exciting as watching iron rust, milk sour or water evaporate. However, former CEO Gregory Hyland owns more than 1 million shares and the top fund holders are Franklin, Vanguard, T. Rowe Price, Harbor and 287 other institutions owning over 90 percent of the float.

About 5,300 water systems in the U.S. racked up violations in 2015, and that constitutes a crisis greater than Flint or any other individual city except for Cape Town, South Africa. Since the political and administration changes, most Cape Town utilities have foundered. Flint’s mayor estimates fixing the Flint system will cost over $1.5 billion. And according to Columbia University School of Public Health, the eventual health care bill will be over $400 million. Every waiting day increases the “fix-it” costs.

And I believe that an 800-share position in your 401(k) should sit in your account like a lump of coal. With increasing dividends reinvested each quarter, MWA could be worth more than $41,000 in the coming 10 years. And don’t use your Morgan Stanley broker (Morgan may have the highest commissions on the Street) to buy 800 MWA because they’ll charge you about $425. Rather, consider Schwab, Fidelity or another high-class discount broker and pay only $4.95 in commission.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com

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