I asked a colleague of mine if he had any good stock ideas for me to write about. He told me that the most undervalued stock out there today is Paul Mueller Company (MUEL.OB). When first looking at the stock, I didn't take it seriously. It has a $27 million market cap, trades on the OTC markets, and has extremely low volume. However, once I delved into the numbers, I realized that this could be one of those rare hidden gems. It's one of those stocks that very few people look at or know about, but it could easily double or triple in the next year. Even if the stock remains undervalued, the Company has no qualms about distributing earnings to shareholders.
Paul Mueller Company specializes in the design and manufacture of stainless steel tanks, processing systems, and equipment for the food, dairy, beverage, chemical, biofuels, pharmaceutical, biotechnology, and pure water industries. Its products are used in over 100 countries. It is constantly upgrading its technology, and with its experience in heat exchangers and refrigeration products, there's talk of it entering the natural gas transport space. Although this is unlikely, it is possible. If that happens, we're talking about a potential 10 bagger here with the size of the natural gas transport industry.
2009 and 2010 were tough years for Paul Mueller Co.. Mueller had over 1000 employees at its peak in 2007, but then business slowed down during the recession and they had to layoff about half of their workforce. In 2011 they bounced back with a vengeance and things just kept getting better and better for them. This 2 minute news video from July 2011 illustrates their business and comeback. The Company is still hiring and expanding as shown here.
Mueller has a foothold in many different countries and industries and has much room to grow. Mueller Lichtenvoorde, BV, is Mueller's wholly owned subsidiary and makes and sells its products in Europe. Paul Mueller Co. in Springfield, Missouri sells and services its equipment worldwide.
The company is experiencing a fantastic growth spurt and is in a sweet spot in this niche, international industry. The following is my discounted cash flow analysis of MUEL:
I think this is a conservative earnings outlook for the company yet it still gives it a net present value (NPV) per share of $79. That's using an 8% discount rate and assuming they'll get $6 million in net income for 2012, growing 10% through 2014, then 5% growth from 2015 to 2020, and having flat annual income of $9.7 million thereafter. Since the company gets paid to constantly service its machines and equipment sold to customers, keeping the income flat from 2020 on might be too conservative. This model also assumes the company won't get involved in natural gas, which is also a possibility. Mueller's flagship products are dairy farm equipment. Milk drinking isn't slowing down, and is growing in developing countries. The Company has improved technology and is in a much more secure position than it was before and during the recession. The Company's gross profit margin is also much higher now.
Mueller has lately experienced spectacular growth. Net sales grew 22.4% from Q110 to Q111, and then another 33.4% from Q111 to Q112. The upcoming Q212 should be quite a bit higher than Q112. The first quarter is historically Mueller's slowest quarter, as it is during winter. Notice that was the case in 2010 and 2011. Net sales grew 29% from Q110 to Q210, and grew 38% from Q111 to Q211. If revenues grow 30% from Q112 to the current Q212, then it will have revenues of $53.5 million this quarter.
The Company's important predictor for future growth is its backlog. That's the amount of orders in dollars that the Company will fulfill in upcoming periods. Notice back in 2010, the backlog was consistently in the $30 million range. Then it grew to the $50 million range in 2011. The latest Q112 produced a whopping $66.4 million in backlog. That level of backlog is similar to the backlog in the year ending 2007 which was $69.2 million. The Company can expect around the same amount of net sales as was in 2008, maybe a little less. With the momentum the company is experiencing, I predict about $200 million. Margins have also improved. Q112 had a net margin of 3%, compared to net losses in Q110 and Q111. A 2012 net margin of 3% gives net income of $6 million for the year, which is shown in the above model.
Honest and Smart Management
Before I bought a position in MUEL.OB, I was a little concerned about it being on the OTC markets. However, after some research I became comfortable with it. The stock was on the NASDAQ from 1993 to 2005, so the management has an experienced track record. The Company decided to delist from the NASDAQ in 2005, which it explains why here. Going through all the required Sarbanes-Oxley procedures cost the Company about $1.4 million per year and more work. MUEL.OB was always a stock with very low volume and wasn't covered by any analysts. Therefore, they decided to go to the Pink sheets because that would allow management to spend more time on operations and also save significant cash. The Company still gets audited by an independent accounting firm every year. The Company had always given a dividend up until it ran into troubles in 2010. I am sure that once its income is up again it will renew its dividend policy.
Disclosure: I am long MUEL.OB.