Automated Meter Reading: Badge Meter's Gift to Shareholders

| About: Badger Meter, (BMI)

Ingenuity has always held a special place in the hearts of investors. When it involves a facet of life that most of us take for granted and makes us say "Why didn't I think of that?" that's just the beginning; the execution of turning it into a profitable and sustainable business is the real challenge. Badger Meter (NYSE:BMI) makes commercial and residential water meters and sells them to utilities. That may not sound very exciting, but it's a $200 million business experiencing double-digit profit growth thanks to products like the Orion automatic meter reading system, which uses mobile radio frequency technology to offer drive-by digital connectivity for utilities. Welcome to the 21st century.

Badger Meter is in the business of flow measurement and control technology. The company points out that only 15% of residential water meters in the U.S. have been converted to automatic meter reading [AMR] technology, so if you still see the local utility employee walking your neighborhood every month or two you're not in the minority...yet. As meters come due for replacement, though, many utilities are converting to AMR for the obvious long-term efficiency gains over locally read meters.

Last month, Badger Meter reported net sales of $63 million for the third quarter, an increase of 16.2% from a year earlier. The company announced plans to shut down its operations in France so it took a big charge for costs associated with the decision. Excluding those one-time costs, net earnings were 22 cents per share. For the year, EPS is seen at $0.95, unchanged from a year ago, but that figure is expected to jump to $1.19 next year and continue to grow at a 13.5% rate over the next five years according to analyst estimates.

Utilities will soon be able to connect to their meters through a variety of options including power lines, phone lines, radio frequency, and satellite. In some cases, Badger Meter has partnered with other companies to offer the full range of connectivity options. In addition to the utility business, the company makes flow measurement and control products for industrial applications such as automotive fluid meters and systems, electromagnetic meters, and other fluid control devices used in industrial processes.

The company benefited from the lengthy boom in home building in recent years, so now this key source of growth is in jeopardy. Nonetheless, Badger Meter appears to be well positioned to capture the major market shift in the way utility meters are read as utilities replace old meters and upgrade.

Badger Meter is still a fairly small company from an investor standpoint, with a market capitalization of $359 million. It is also thinly traded, with average daily volume of just 49,830 shares. The company split its stock 2-for-1 in 2004 and again in 2006, so that seemed to increase liquidity and attracted some much needed attention. There are just three analysts covering the stock, two of which rate it a strong buy. The stock has bounced around in a sideways range centered around the mid-$20s this year, but it is up from a split-adjusted $9.32 at the end of 2003 when we first wrote about it.

This stock also pays an annualized dividend of $0.32, giving it a current yield of 1.20%. For those looking for a behind-the-scenes innovator that flies under the radar of most institutional investors, Badger Meter might warrant further study, though it is no longer the undiscovered bargain it once was. It is capturing a sea change in the utility industry, delivering hefty profits and paying a solid dividend yield.

BMI 1-yr chart
BMI 1-yr chart