2023-12-12 13:24:00 ET
Summary
- Mueller Industries is a building materials company that offers potentially ongoing capital gains and a modest dividend.
- The company operates in multiple countries and its revenue is primarily generated from the US.
- Mueller has competitive advantages and strong financial performance, although its growth rate has slowed compared to the two previous years.
Thesis
Mueller Industries, Inc. ( MLI ) is a building materials company that I believe should provide investors with ongoing capital gains plus a modest dividend. Given the current fundamental and charting details, I consider it to be fairly valued.
About Mueller
Founded by Hieronymous Mueller in 1852, the firm specializes in piping systems, industrial metals, and climate machinery:
MLI Segments (Investor Presentation)
It operates in the United States, Canada, Mexico, Great Britain, South Korea, the Middle East, and China. According to its November 2023 investor presentation, just over three-quarters of its revenue originates the U.S.
In its 10-K for 2022 , it reported that new housing starts and commercial construction are key drivers because a significant portion of its sales end up in the construction of single and multi-family housing and commercial buildings. Repairs and remodeling projects are secondary drivers, while its products are also used in transportation, automotive, and industrial applications.
Competitors
Competition varies by segment and geographic location, and according to the 10-K, its competitors include:
- U.S. copper tube business: Cerro Flow Products LLC (a subsidiary of Marmon Holdings, which, in turn, is a Berkshire Hathaway (BRK.B)(BRK.A) company), and Cambridge-Lee Industries LLC (a subsidiary of Industrias Unidas S.A. de C.V.).
- European copper tube business: several European-based and foreign-based manufacturers of copper tubing as well as other foreign-based manufacturers.
- Canadian copper tube business: foreign-based manufacturers.
- Copper fittings market: domestic competitors include Elkhart Products Company (a subsidiary of Aalberts Industries N.V.) and NIBCO, Inc.
Competitive advantages: It claimed these advantages in its investor presentation:
MLI Competitive Advantages (Investor presentation)
Elsewhere in the presentation, it references its history of being profitable through all economic cycles, a global manufacturer, a diversified portfolio of products, and having a trusted reputation.
Do these factors provide a competitive moat? Yes, the premise is backed up by a return on common equity and a return on total capital, both TTM, that beat the industrials sector by 164.65% and 262.61%, respectively:
MLI Return on Common Equity (SeekingAlpha)
Those high figures reflect its post-pandemic performance; I expect future returns to be lower but still solid.
Growth
Despite those advantages, Mueller gets only a C+ rating for growth from the Seeking Alpha quant system:
MLI ratings for growth (SeekingAlpha)
By contrast, this chart from the investor presentation shows exceptional growth in the past two years:
MLI financial highlights (Investor presentation)
Why the difference? The Seeking Alpha numbers are relative and provide a year-over-year comparison. In other words, they compare the exceptional growth of 2021 with the less exceptional growth in 2022.
On the other hand, the operational performance and diluted EPS numbers from the presentation are absolute--in dollars. They capture the very strong growth from 2020 to 2021 and the slowing, but still healthy growth from 2021 to 2022.
Mueller has not offered an outlook for this year, but results for the first nine months are coming in below those for 2022. For the first nine months of this year, from the third-quarter earnings release:
- Net sales are down, from $3.1 million in 2022 to $2.67 million this year.
- This year’s consolidated net income for the first three quarters is $490,353, compared to $522,585 last year.
- Diluted earnings per share were $4.26 this year, down 7.2% from last year’s $4.59.
This year’s declines have several causes. In the first-quarter earnings release, the firm pointed to lower copper prices and lower unit volumes in its international mill businesses. In the second quarter, it blamed “the normalization of demand across our three segments. In addition, lower COMEX copper prices, which were 11 percent below the second quarter of 2022, contributed to the decline.” The third quarter was lower because of reduced demand in the wholesale channel and because it sold its PEX plastic piping business (which had previously contributed $11.2 million in net sales in the prior year’s quarter).
What the 2023 numbers to date do show is that Mueller is continuing to operate at elevated levels and has not dropped back to pre-Covid levels. Earnings remain well ahead of those in 2020 and previous years.
Its free cash flow is similarly strong and should support continued expansion of its existing industries and adjacent opportunities. According to the presentation, it has a favorable long-term outlook, a resilient business model, a solid, strategic framework, and balanced capital deployment.
It also claims to outperform its peers and competitors:
Charts showing MLI returns versus those of competitors (Investor presentation)
It's worth noting on this chart that Mueller's return on equity has been ahead of its peers since 2017, well before the pandemic began.
Worth noting as well is that it had only $1.3 million in long-term debt and $1.9 million in total debt outstanding at the end of the third quarter.
What should we expect for future growth? More of the same, although not necessarily at the same rate as the post-Covid years. America continues to have a housing shortage of 6.5 million, according to CNN Business . That represents a lot of piping and valves. The US housing market is short 6.5 million homes.
Second, while its revenue does contract with economic slowdowns, there are always lesser or greater booms after the busts. Long-term investors should fare well by riding out the busts and profiting on reversions to the mean.
Dividends
Mueller pays a modest but solid dividend, and receives high grades from Seeking Alpha :
At the recent share price of $42.60, the dividend yields 1.41%. The payout ratio is low at 10.77%, and the dividend five-year growth rate is 24.57%.
Valuation
The company has a price-to-earnings, non-GAAP, forward ratio of 8.97, which is roughly half of the industrial sector median of 17.67.
The price-to-sales forward ratio is 1.43, 5.31% higher than the industry median of 1.35. EV-to-EBIT is 5.40, well below the industry median of 15.91. Two of these three metrics indicate Mueller is undervalued.
From another perspective, this may be one of those cases where timing matters. This five-year chart shows relatively regular up-and-down cycles, with the stock currently getting close to a new high:
My own take is that this is a good prospect for investors seeking long-term capital gains, and if your time horizon stretches out from three to five years, then the current price is a fair price. If your horizon is less than three years, the price will be too high until it is pulled down again by another economic slowdown.
Wall Street and Quant analysts are slightly more bullish, with both giving the firm Strong Buy ratings.
Risks
As a manufacturer, Mueller is exposed to the prices and availability of raw materials, and as an international firm, it has exposure to currency fluctuations.
As noted, the construction industry, both residential and commercial, is sensitive to economic conditions.
The markets served by the company are competitive, and imports can threaten both market share and margins.
Again, as a manufacturer, Mueller is subject to environmental, health, and safety regulations. And as it points out in the 10-K, costs of environmental remediation at contaminated sites are difficult to estimate and may exceed its reserves.
In addition, its costs could be driven up by new regulations to reduce greenhouse gas emissions.
Conclusion
Mueller Industries is a solid, albeit somewhat cyclical, growth stock. It is driven mainly by the need to build new homes and commercial facilities as well as to upgrade older stock. It may not grow as quickly as it did in 2021 and 2022 going forward, but it should continue to grow.
Thanks to its ongoing profitability, despite the cyclical dips in revenue, it is producing cash flow to fund its internal growth, acquisitions, dividends, and share buybacks.
I expect Mueller to keep providing investors with capital gains, with a modest dividend as a bonus, and therefore give it a Buy rating.
For further details see:
Mueller Industries: Expect More, But Slowing, Growth