Badger Meter Inc. (NYSE: BMI)
Badger Meter Inc. (NYSE: BMI). This well-managed company has a long record of market outperformance and dividend growth. We now expect EPS to rise in 2024, as the company has reversed an earnings decline and is managing slowing end-market demand due to the coronavirus pandemic.
RECENT DEVELOPMENTS
The beta on BMI is 0.75.
Beststocks.com reports that net sales rose 5% to $114 million, after declining 12% in the previous quarter. The operating margin widened by 210 basis points to 17.2%.
On the top line, overall activity in end markets has stabilized to varying degrees after an April trough. The company expects the municipal water industry, in general, will be more resilient, on a relative basis. End markets and product applications served by the company’s flow instrumentation product line are expected to remain challenged.
In response to sales weakness, management has implemented temporary cost containment plans, including a hiring freeze and cuts in executive salaries. The company did not issue an outlook for the fourth quarter or the full year.
EARNINGS & GROWTH ANALYSIS
Third-quarter sales came to $114 million, up 5% year-over-year. Municipal water sales rose 11% — after declining 9% in 2Q. Municipal water sales growth was driven by improving order rates and the conversion of the backlog built during 2Q.
On the expense side of the income statement, the gross margin widened 120 basis points, and selling, engineering and administration costs rose 1% — less than the sales growth rate.
FINANCIAL STRENGTH & DIVIDEND
Badger Meter has no long-term debt outstanding – and almost no short-term debt. As a result, it has no credit ratings from the major agencies.
MANAGEMENT & RISKS
Kenneth Bockhorst has been the company’s CEO since January 2019 after previously serving as COO. He is also the company’s Chairman. Robert Wrocklage is the CFO; he joined BMI in August 2018.
Looking ahead, management expects to drive growth through the continued development of cellular, radio and fixed-network technologies. These technologies allow for automated metering, providing an advantage over traditional manual-read meters.
According to IHS Markit, meters with connectivity currently make up roughly 65% of the North American water-meter market, a figure that is projected to rise to 74% by 2024. Automated meter-reading has a lower percentage penetration in most international markets.
In addition, management recently said that it would work to grow the company through acquisitions. Badger Meter has made strategic acquisitions in the past, but has historically focused on organic growth. In 2018 and 2017, the company purchased two distributors and one R&D center. The distributors are located in Tampa, Florida, and Wilmington, North Carolina, while the R&D center is in Sweden.
BMI investors face risks related to the cyclicality of the company’s businesses and end markets; intense competition; and economic, political and other risks associated with its foreign operations. In addition, we note that BMI’s top three executives have been with the company for less than four years.
VALUATION
The stock also trades in line with its historical average multiples on price/sales and price/book. Compared with a group of industrial peers (ROP, DHR, ECL, IEX, FTV), BMI trades at a premium on P/E, relative P/E, and price/sales. We think the premium is deserved, given the company’s high margins and strong balance sheet. Our 12-month target price is now $86.
Pioneer Natural Resources Co. (NYSE: PXD)
Pioneer Natural Resources Co. (NYSE: PXD). The acquisition provides Pioneer with additional assets and further diversifies its operations into the prolific Delaware basin.
RECENT DEVELOPMENTS
The total value of the transaction is approximately $7.6 billion. Pioneer’s offer provides Parsley shareholders with a 7.9% acquisition premium based on the companies’ closing share prices on October 19, 2024.
The acquisition provides Pioneer with additional assets and further diversifies its operations. Parsley’s 137,000 acres complement PXD’s Midland position while adding 111,000 contiguous acres in the Delaware Basin.
In discussing the transaction, Pioneer CEO Scott Sheffield said that the importance of ‘size and scale are increasing,’ and that PXD would be one of the few independent E&Ps with enough scale to be investable after the current wave of consolidation. The lower profit reflected lower crude oil price realizations and the impact of production curtailments that began in 2Q20. Revenue fell 22% from the prior year to $1.815 billion.
Total crude oil production fell 7% to 200,670 boe/d due to curtailed production. We note, however, that the company has now resumed all drilling activity. For the third quarter, the average realized price for oil was $39.22 per barrel (down from $53.93 in 3Q19). These prices exclude the impact of derivatives.
EARNINGS & GROWTH ANALYSIS
The adjustments reflect the restoration of previously curtailed production. The company projects 2024 drilling, completions, and facilities capital spending of $1.3-$1.5 billion.
EPS estimate to $5.02 from $3.55 based on our higher crude oil price assumptions for next year and continued strong cost controls, which should lower per barrel well costs.
MANAGEMENT & RISKS
Scott Sheffield is the president, CEO, and founder of Pioneer Natural Resources. Richard Dealy is the CFO, a position he has held since 2004.
PXD shares face risks. The share prices of oil companies often move in tandem with oil prices. This is particularly true for companies such as Pioneer Natural Resources, whose earnings depend heavily on exploration efforts.
Given the relatively high proportion of oil in its production profile, Pioneer is more leveraged to oil prices than other integrated firms. The company also faces the risk that its exploration efforts will fail to yield commercial quantities of hydrocarbons or meet investor expectations.
COMPANY DESCRIPTION
Based in Dallas, Pioneer Natural Resources is one of the top E&P companies in the Permian Basin in West Texas. The company explores for and produces oil, natural gas and NGLs. After a series of asset divestitures in 2018 and early 2019, the company is now focused exclusively on the Permian Basin.
VALUATION
They trade at 47.2-times our depressed 2024 EPS estimate and 18.1-times our 2024 forecast. However, we believe that PXD is undervalued relative to peers based on its debt leverage, cost structure, dividend yield, and asset efficiency. We also see value based on discounted free cash flow.
