Badger Meter ($4B EV, no debt) is the only publicly traded company that manufactures water meters. The name recently popped up as a new buy in a manager letter to clients. I am not a client of this manager but I get LOTS of these letters through my network. The manager is Vulcan Value Partners. The manager's small cap strategy has a horrible 3yr and 5yr record vs the Russell 2000 but has beaten the index since 2007, the strategy's inception. Do not take this discussion as endorsing the manager in any way.
Back to BMI, the stock has been hammered after a big earnings miss. The shares have recovered from that drop but are still down materially from the highs. The business is experiencing less small contract municipal orders and more larger "turnkey" projects. These projects are generally associated with new construction. We all know housing demand is down. BMI is likely suffering from that trend, it just took a while for the slowdown to make its way into the numbers given the lead time on its business historically.
There is no question this is a durable franchise. The company is not cheap by any absolute measure but it is cheap relative to where it has traded for the last 10 years, 19x EBITDA and 4.3x Sales down from almost twice that. That is always a sticky situation for value investors. Does the growth slowdown demonstrate that the franchise is weaker than past investors have assumed or is this a chance to buy a great business that has stumbled temporarily?
I am not going to answer that question but I encourage everyone to take a hard look. The balance sheet is pristine. An ROE of 20%+ with no debt is quite the achievement and very hard to find. Slowing growth will likely mean a surge in FCF in the short term. What will management do with that extra FCF? The company does not do net share buybacks from what I can see. 29 million shares outstanding for the last 10 years.