The Multiple Tailwinds That Could Push Mueller Water Products Higher

| About: Mueller Water (MWA)
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Mueller Water Products recently divested Anvil International.

The water infrastructure industry could be at an inflection point, and Mueller Water Products' decision to divest Anvil International could prove to be both timely and lucrative.

The company increased its buyback program and raised its dividend.

Mueller Water Products (NYSE:MWA) is one of the many stocks which experienced an explosive post-election pop. The company falls into two categories of stocks that were propelled higher atop a wave of post-election optimism: it is both a domestic, small-cap company and one with ties to infrastructure. In a classic example of "shoot first, ask questions later," many stocks which fit these criteria experienced sudden love from investors. In other words, although president-elect Trump's plans have yet to be implemented, investors have been pouring funds into companies that could benefit from his presidency.

Mueller Water Products has gained 16% since the election, off its peak of a roughly 27% gain. Despite its recent performance, I still believe Mueller Water Products has more upside left. The company's recent sale of Anvil International to One Equity Partners increases shareholder value in the near-term and allows the company to become a higher-margin, pure-play water infrastructure company. In my opinion, the latter has always been the most promising opportunity for Mueller Water Products, and the company's decision to divest Anvil International appears to be a strategic move that could bear fruit for years to come.

I have liked Mueller Water Products as a play on water infrastructure due to some incredible statistics; ones which are largely the reasons why this area represents the most promising opportunity for the company. Over the next 20 years, an estimated $384 billion will need to be spent on water infrastructure. Of this massive amount, $247.5 billion is expected to be allocated toward industries in which Mueller Water Products operates.

Source: Company presentation

Additionally, there is no doubt that Trump's promise of creating jobs in America, primarily in areas of infrastructure, will benefit Mueller Water Products. Whether or not you voted for him, the reality is that Trump will be sworn into office in a few short days. Trump's loud-mouth presidency may turn out to be the catalyst that quickly gets the ball rolling for Mueller Water Products.

Macro tailwinds aside, Mueller Water Products recently completed what is, in my opinion, a well-timed and lucrative divestment of one of its businesses. One principal of economics is that companies face tradeoffs, and this certainly applies to Mueller Water Products. The company's sale of Anvil International has forced it to let-go of approximately one-third of its annual revenue. However, the company's $315 million sale - of which it will receive estimated net proceeds of $250 million - allows Mueller Water Products to immediately increase shareholder value as well as focus on the long-term. In conjunction with a statement regarding the formal sale of Anvil International, Mueller Water Products announced that it expanded its share repurchase authorization up to $250 million, or more than 10% of the company's market capitalization. In addition, the company increased its quarterly dividend by 33% to $0.04 per share.

Aside from increasing shareholder value through buybacks and dividends, the sale of Anvil International allows Mueller Water Products to become a pure-play water infrastructure company. Although Mueller Water Products takes on more risk by lowering its sector diversification, the long-term prospects of the water infrastructure industry deserve the company's full attention. With Trump taking office, infrastructure could be at an inflection point. This means that Mueller Water Products' divestment could be very timely because it can grow the promising portions of its business before potential macro-tailwinds occur. Via its sale of Anvil International and, so too, its ties to the oil and gas industry, Mueller Water Products can focus solely on water infrastructure.

With its proceeds from the Anvil International sale, Mueller Water Products can also invest in its core businesses and pursue strategic acquisitions in areas that complement its core. By investing in its core businesses - Mueller Co. and Mueller Technologies - Mueller Water Products can further drive growth in these higher-margin areas. Together, these companies have a healthy average adjusted EBITDA margin of 20.4%.

Furthermore, a quick analysis of Mueller Water Products' earnings and taxes stresses the impact of Trump's presidency. For the full year ending in September 2016, Mueller Water Products earned an operating EBIT profit of $120.6 million. After subtracting the company's net interest expense of $23.6 million, the company was left with $97 million in pre-tax income. With an effective tax rate of 34.1%, Mueller Water Products paid $33.1 million in taxes and earned $63.9 in net income, or $0.39 per share.

If Trump's proposed 15% income tax plan were to materialize, Mueller Water Products would benefit greatly. Using the same $97 million in pre-tax income, a tax-rate of 15% would mean the company pays $14.55 million in taxes and earns $82.45 million in net income, or $0.51 per share. This represents an increase in earnings per share of 31%. It also supports the "shoot first, ask questions later" mentality into which many investors fell after the election: although his tax plan has yet to be introduced, its prospect alone makes the case for owning Mueller Water Products.

Couple the company's advantageous tax-break opportunity with its improved short- and long-term fundamentals, and Mueller Water Products looks poised to continue its rise higher.

Disclosure: I am/we are long MWA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.