January 30, 2007

Mueller Water Products

Mueller is the leading North American provider of water infrastructure and flow control products – things such as fire hydrants, valves, pipes, fittings and couplings. While this is no doubt a mundane business, it is also an excellent one.

Mueller has a strong competitive position, with one of the largest installed bases in the US and 74 per cent of sales coming from products with number one or two market positions.

Adjusted for one-time charges, its operating margin was 14 per cent in its latest fiscal year and revenue, earnings before interest, tax, depreciation and amortisation and operating income grew 11 per cent, 30 per cent and 42 per cent, respectively. Future growth prospects are excellent, as the crumbling US water infrastructure – the American Society of Civil Engineers gave US drinking-water and wastewater infrastructure a grade of “D-” in 2005 – will require billions of dollars of new investment during the next few decades.

So what is Mueller worth? Using three different valuation methodologies – private market value, peer public company multiples and a sum-of-the-parts analysis, we think Mueller shares are worth in the mid-$20s, versus under $15 today. We think that is plenty cheap for a stable, high-quality business and have been buying aggressively at today’s prices.


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