MWA - Mueller Water Products: Trading At A Premium Valuation

2024-01-19 18:16:16 ET

Summary

• MWA posted Q4 FY23 results with a decline in net sales and underperformance in water flow and water management segments.
• Despite healthy margins and solid income, stagnant sales growth is expected in the coming quarters, affecting financial performance.
• MWA is trading at a premium and the price chart indicates bearishness in the short term, making it not worth investing in.

Mueller Water Products ( MWA ) manufactures products for the transmission of water used by construction industries and municipalities. MWA posted its Q4 FY23 and FY23 results. I will analyze the results in this report. I believe MWA is trading at a high premium, and with no solid growth expectations, I think it is not worth investing in MWA. Hence, I assign a hold rating on MWA.

Financial Analysis

MWA announced its Q4 FY23 and FY23 results . The net sales for Q4 FY23 were $301.4 million, a decline of 9% compared to Q4 FY22. Its water flow solutions and water management solutions segments underperformed, which led to a decline in sales. The sales from the water flow solutions segment declined by 10% in Q4 FY23 compared to Q4 FY22. The major reason for the decline was the low demand for its iron gate valves. The sales from the water management solutions segment declined by 8% in Q4 FY23 compared to Q4 FY22. Lower hydrants and water applications sales impacted this segment's sales. Its operating income margin for Q4 FY23 was 8.2%, which was 3.5% in Q4 FY22. The significant improvement in operating margin was mainly due to higher pricing and enhanced manufacturing performance. The net income for Q4 FY23 was $17.2 million, which was $7.1 million in Q4 FY22.

Despite the decline in sales, I think the quarterly results were decent because the management delivered healthy margins and solid income, which the company has been struggling with for years now. The annual result was also decent. The sales in FY23 increased by 2.2% compared to FY22, and the net income rose by 11.6%. Considering the current market conditions, I expect its margins to be healthy in the coming quarters. The inflationary pressure is easing, and its operational efficiency has been increasing. However, I expect stagnant sales growth in the coming quarters due to headwinds like customer inventory destocking and a higher short-cycle backlog. The effect of these headwinds is already evident in the Q4 FY23 results, and it is expected to continue to affect them in FY24. Hence, despite the healthy margin expectations, I think stagnant sales growth might affect their financial performance in FY24.

Technical Analysis

MWA is trading at $13.6. MWA looks good for the long term because I see a pattern change in the price chart. It was forming lower highs and lower lows from 2017 to 2020. However, after forming lower highs and lower lows for three years, the stock formed a new higher low in September 2022. So, the stock has broken its bearish structure, and it looks good in the long term. However, talking about the short term, I think the stock might be in some pain because it is currently facing resistance from the $14.3 level. So it might fall in the short term. In addition, this stock has been following a trendline since 2020, and considering the selling pressure, I believe it might touch the trendline in the coming times. The trendline is at $12. So, I see it reaching the $12 level in the short term. So, considering the bearishness in the short term, I think there is no buying opportunity in MWA.

Should One Invest In MWA?

MWA posted decent results with healthy margins. But the future expectations of sales growth aren't positive. I am expecting stagnant sales growth for the coming quarters. Now, looking at MWA's valuation. MWA is trading at a P/E [FWD] ratio of 23.53x, which is above its five-year average ratio of 20.59x. So, MWA is currently trading at a premium, and honestly, I would not have had any problem with the premium valuation if there was a great scope for growth in the future. But due to the inventory destocking issue, I don't think there will be strong growth. So, the premium valuation becomes a problem here, and I don't want to buy a stock that is overvalued and has no solid growth expectations. Additionally, the price chart indicates bearishness in the short term. Hence I think it is not the right time to buy it.

Risk

Spending on new wastewater and water infrastructure is largely reliant on residential development. Because of this, the health and expansion of the residential construction industry have a substantial impact on their financial performance. The single-family versus multifamily construction mix, labor availability, interest rates, inflation, consumer confidence, household formation, availability of mortgage financing, and the degree to which new construction results in the development of raw land are just a few of the external factors that affect this market. Their sales, profitability, and cash flows have been negatively impacted by unfavorable circumstances or ongoing uncertainty in the residential construction market. This includes the possibility that some of their distributors and/or end users will decide to postpone or decline to buy their goods or services.

Bottom Line

MWA is trading at a premium, and the future expectations aren’t that great. So, I think paying for the high premium makes no sense, and its price chart indicates bearishness in the short term. Hence, considering these factors, I assign a hold rating on MWA.

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