MWA - Merion Road Capital - Mueller Water Products: Not Smooth Sailing But Valuation Is Attractive

Summary

• During the quarter I built a new position in Mueller Water Products.
• As such, revenue has historically grown low single digits - this should continue and perhaps accelerate over time.
• Valuation is attractive at just 8x 2024 consensus EBITDA, especially when considering that water peers trade at ~12x.

The following segment was excerpted from this fund letter .

Mueller Water Products ( MWA ).

During the quarter I built a new position in Mueller Water Products. They are a 165-year-old manufacturer of products used in the transmission, distribution, and measurement of water in North America. Their end markets are relatively stable and growing with 60-65% serving repair and replacement of municipal water systems, 10% natural gas utilities, and the remaining residential construction. They are either a leading player in key categories like fire hydrants (#1), iron gate valves (#1), butterfly valves (#1), and brass products (#2). Given MWA’s established brands and installed base, and considering their end customer of US governmental entities, it is not surprising that market share shifts are rare. As such, revenue has historically grown low single digits. This should continue and perhaps accelerate over time given the woeful state of our water infrastructure. At the end of 2021 the US passed a new infrastructure bill that allocated $55bn to water, the highest level on an inflation adjusted basis since the mid 1970’s.

While that background sounds positive, it has not been smooth sailing for MWA. Over the past few years EBITDA margins have contracted from 19% to 15% and pre-tax tangible ROICs have fallen from 35% to 20%. The company has been reorganizing and modernizing their operations in recent years. They expanded their large valve manufacturing in Chattanooga TN and built a new facility nearby in Kimball TN to capitalize on growing product demand. In the process they consolidated several facilities into Kimball for improved efficiency and to accommodate built-in-America preferences. MWA is also in the process of constructing a new brass foundry in Decatur IL to be completed in 2024. While these initiatives have the potential to streamline operations and increase capacity, they have been capital intensive and led to short term pain such as machine downtime and outsourcing.

This past October MWA announced that it reached a cooperation agreement with activist fund Ancora. MWA appointed 2 Ancora nominees to the board of directors, agreed to a longer-term board refresh, and immediately formed a capital allocation and operations committee. While it is too early to see tangible results, it is encouraging to have a vested owner looking out for shareholders’ interests. Valuation is attractive at just 8x 2024 consensus EBITDA, especially when considering that water peers trade at ~12x.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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