Badger Meter Hit By Street Sweeper; Here's What Gabelli & Co Said About The Stock Last Month

• Shares of Badger Meter, Inc. BMI sold off on heavy volume on Tuesday.
• Investors and traders reacted to a report by Street Sweeper which claimed "more disappointments loom" and offered a $37 per share valuation on the stock.
• Analysts at Gabelli & Co. offered an opposing view and valued the stock at $89 in 2019.

Notable short seller and research firm Street Sweeper published a scathing report on Badger Meter.

Street Sweeper's Sonya Colberg said that Badger Meter will have to "dig like mad" to suppress another big profit decline in the coming quarter. She noted that "more disappointments loom" following a "teeth rattling" 18.6 percent decline in year-over-year earnings during the third quarter.

Colberg placed a "fair valuation" for the stock to be around $37 per share.

Gabelli & Company Disagrees

Jose Garza of Gabelli & Company offered a different view on the company in a sector-wide report published on October 7.

According to Garza, the U.S. water metering business represents an "attractive" investment opportunity. As spending on water infrastructure accelerates, the metering industry will be a direct beneficiary. The analyst said Badger Meter represents "one of the few companies" that will "likely benefit from continued expansion" of the water metering industry.

Garza said Badger Meter is an "innovator" in the industry and was the first company to introduce automation in 1988. The company was also the first to commercially introduce Advanced Metering Analytics in 2011. The company also benefits from a solid management team as its Chairman and CEO Richard Meeusen has been with the company since 1995 and took over as CEO in 2002. Since that time, the company has experienced a 6.7 percent annual growth in revenue and 12.4 percent annual increase in net income.

Garza noted that Badger Meter benefits from the "oligopolistic nature" of the US water metering market given its industry-leading 30 percent share of water meters and 16 percent share of radios. The company aims to grow its revenue and earnings through growth in its U.S. market share and investments internationally.

Badger Meter's management suggested that the automated metering market is still underpenetrated and is expected to grow in the coming years. The company's latest product is its BEACON Advanced Metering Analytics (AMA) system that offers the first cost-effective cellular residential radio and has the ability to send email and text alerts if leaks are detected, thereby preventing water loss.

The analyst cited a report by research firm IHS that predicted there will be 600,000 cellular enabled smart water meters shipped to North America annually by 2020. Garza expects Badger Meter will represent a "meaningful part" of this market.

Finally, Garza pointed out that Badger Meter also focuses on profitable niche markets in several applications such as HVAC (heating, ventilating, and air conditioning), and vehicle lubrication. The company is also looking to expand within the food & beverage, chemical, oil & gas industries and can also pursue small acquisitions to help fuel growth.

Looking forward, Garza expects the company can generate a high-single digit EBITDA growth rate and low double-digit earnings per share growth rate, derived from a 5 percent revenue growth.

At the time of publication, Garza noted that shares were trading at 15.3x and 13.1x his 2015 and 2016 EBITDA estimates of $60 million and $70 million, respectively. His 2016 Private Market Value is $60 per share and will grow to $86 per share in 2019.