Recently, Mueller Water Products
Mueller's three-pronged business
Mueller is a tadpole by most company measures. It was spun off from Walter Industries
Conference presenter and company CEO Greg Hyland showed the audience a slide of net sales over the last 12 months. Mueller represented 41% of the total, followed by U.S. Pipe at 30% and Anvil at 29%. Mueller is by the far the most profitable segment, having accounted for 61% of EBITDA over the same timeframe, with Anvil representing 23% and U.S. Pipe pulling up the rear at 18%.
Overall, Hyland highlighted that 75% of company products sold hold leading or No. 2 positions in markets served, making Mueller Water Products one of the largest water infrastructure firms out there. Water forms the core for 70% of total sales, with commercial construction accounting for the remaining 30%.
Short-term pain, but long-term gain?
Too bad, then, that near-term headwinds are holding back Mueller's long-term potential. Hyland detailed that 55% of its water infrastructure sales stem from residential construction, meaning the firm was unable to offset a "40% drop in housing starts since January 2006" with its replacement products and commercial construction businesses. It's working through current challenges by reducing headcount and inventories, but third-quarter results suffered, as sales came in flat and operating income fell more than 17%.
Now that we've laid the groundwork for what makes the company tick, let's move on to its market potential. Hyland pointed out that water infrastructure underinvestment has resulted in domestic "water leakage rates as high as 20%" and conditions far more dire than those for the nation's bridges and other aging infrastructure. Throw in fears over global warming and population migration to desert locations such as Phoenix and Las Vegas, and there's plenty of growing demand for new investment to go along with repairing existing water treatment facilities and distribution channels.
The Foolish bottom line
Fellow Fool Sham Gad recently suggested that this could lead to plenty of long-term riches for Mueller. Recent developments are keeping the stock near its lows for the year, but if Mueller can realize just a portion of the potential in the water infrastructure business, then Fools should definitely consider using these short-term concerns to their advantage.
There's some near-term risk, given that Mueller's Class A shares trade at 18 times earnings expectations for 2007, and earnings could still fall further, given current subprime woes and residential construction trends. The Class B shares trade at a more reasonable 17 times forward projections and also include eight voting rights per share, as opposed to the one vote per share for the A class. This is clearly an advantage when it comes to shareholder voting, but other than that, the company's investor relations site says that both classes "generally have identical rights in all material respects." Regardless of the minor share-class differences, looking out the next 12 to 18 months, market trends seem to be in Mueller's favor.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. Mueller Water Products class B shares Walter Industries are Motley Fool Hidden Gems recommendations. The Fool has an ironclad disclosure policy.