The performance of shares of Mueller Water Products (NYSE: MWA) probably has led more than a few investors to reconsider their decision to stay invested in the stock. But there are a few who have other things in mind. Appaloosa founder David Alan Tepper is one of those people.
Tepper's Appaloosa Management disclosed in its recent 13G filing that it has bought a 5.8% stake in the water infrastructure company that now accounts for a 0.2% portion of the entire portfolio. The $16 billion fund has bought 2.5 million shares in Mueller.
Running in losses
You may be wondering why investing great Tepper might be going out on a limb like this on a company whose recent performance includes the following highlights:
- Running losses for two years now.
- Annual revenue down from $1.8 billion in 2008 to $1.3 billion in 2010.
- A stock price that has been falling over the past five years.
A bet on future
Financial aspects aside, I think I know what Tepper is seeing here and he's probably looking beyond the horizon before making this move.
Water is this planet's most precious commodity. One-eighth of the world's population does not have access to safe water, and the situation is likely to worsen in the next five, 10, or 20 years. Governments across the globe have acknowledged the need for conserving water and put in place policies and programs toward effective water usage. Greater thrust on effective water usage would necessitate demand for storage, treatment, and testing equipment, helping water infrastructure companies such as Mueller, California Water Service Group (NYSE: CWT) and Veolia Environnement (NYSE: VE) in the future. My guess is that Tepper sees the potential for this company over the long term.
Tepper is probably aware that companies need to be particularly sensitive to the issue of water when they look for sustainable growth. Given rapidly declining water quality and water shortages, Tepper probably is gauging the environment's impact on companies, in particular in industries that are most exposed to water risks, including food and beverage, power, mining, and manufacturing.
Not a long-term loss
After looking a bit closer at Mueller's financials, I think I'm even seeing something that most of the markets are missing. In fact, I believe the financials themselves do not really indicate that Mueller has been a laggard. Here's why:
First, if you take a closer look at the company's income statement for the year 2009, you will find that the company incurred a non-recurring expense of $1 billion. This is attributed to impairment and restructuring expenses, which is a one-time expenditure. That has the effect of artificially weighing down the earnings number in the short term.
Before that, in 2008, the company had earned a net profit of $42 million. A loss of $99.6 million in 2009 was mainly due to this one-time expenditure. Although in 2010 the company reported a net loss of $45 million, Mueller was successful in trimming the losses. A huge non-recurring expenditure cannot always be written off in a year, and that has weighed on the company's performance to a certain extent. But hopefully, next year will see Mueller in the profit zone, back to where it was earlier and, I think, back where it belongs in the future.
A good foresight
Buying stocks of a company that is just recovering from its bad days and inching toward profitability is a wise decision on Tepper's part. Through the investment, Tepper appears to be quantifying the risk that scarcity of water poses and is making a move before others can blink.
