Mueller Industries Inc. (MLI, Financial) is a stalwart of America’s basic industries. It is, in my opinion, currently offering an attractive value proposition for retail investors, despite reports of GDP contracting even as inflation soars.
Consumer spending jumped 18% in March. Durable goods orders are climbing with factories, and defense and aerospace spending is flying high. I expect the U.S. economy to expand this year along with the demand for what Mueller makes and sells; look for the company’s revenue and earnings to jump up in 2022.
I have multiple reasons underpinning my bullish position, not the least of which is the 94/100 GF Score. The stock also looks attractive based on several other valuation metrics as well as macro conditions, analyst ratings and the potential to be an acquisition target.
Mueller operates in a basic industry, manufacturing and selling copper, brass, aluminum and plastic products essential to the health of the nation’s economy.
The company was founded in 1917 and today operates in its home country of the United States as well as in Canada, Mexico, Great Britain, South Korea and China.
The Domestic Piping Systems Group manufactures copper tubes and fittings, plastic fittings and line sets for domestic sales and exports. Its Piping Systems division sells to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers and air-conditioning original equipment manufacturers. The Trading Group manufactures pipe nipples and sources products for import.
The Industrial Metals group manufactures and sells brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum impact extrusions; and gas valves and assemblies. It targets domestic OEMs in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration and energy markets.
Its Climate division manufactures and sells refrigeration valves and fittings, fabricated tubular products, high-pressure components and coaxial heat exchangers. The segment sells its products primarily to the heating, ventilation, air-conditioning and refrigeration markets in the U.S.
Snapshot of first-quarter results
The company reported first-quarter 2022 earnings about six weeks ago. As it turns out, inflation is not a brake on sales because OEMs need Mueller products.
Operating Income came in at $212.7 million versus $92.5 million in the first quarter last year. Net income was $158.3 million versus $63.1 million, earnings per share were $2.78 versus $1.11 and net sales were $1.01 billion versus $818.1 million. I do not yet feel confident in making any EPS forecast yet for the next quarter, but last year, EPS was $1.92 in the second quarter.
Short interest ticked up to 4.67%. That possibly reflects insiders selling more than 88,000 shares over the past nine months. Individual insiders bought 15,450 shares in that same period. Hedge funds, however, increased their holdings by some 38,000 shares over the last quarter.
The company’s short-term assets of $1.2 billion outstrip both the short-term liabilities of $451.6 million and long-term liabilities of $88.2 million. Mueller's equity has predominantly been higher than debt except for brief periods.
Receivables, other assets and inventory are $1.8 billion, while cash is $140 million. Liabilities without equity total are about $538 million.
There are some dull spots on the company's shine, but nothing worrisome in my view The forward dividend yield is a meager 1.88%, but Mueller has consistently paid the dividend. The company recently raised it from 13 cents to 25 cents per share. The next ex-dividend date is June 1, 2022.
Institutions own over 92% of the shares; that might be deleterious for planning and operations but a positive portent if there is anything to the talk of the company potentially being acquired.
In the below chart, we can see that Mueller is currently fairly valued based on GF Value, projected free cash flow value and median price-sales value. It is slightly undervalued based on the Graham Number and heavily undervalued based on Peter Lynch fair value and discounted cash flow.
The company is profitable, has virtually no debt and holds more cash and other assets than liabilities. The current share price thus has potential to rise as revenue and earnings increase.
Its financial technicals are consistently in positive territory. The return on equity is almost touching 51% for the trailing 12 months. Asset growth has been about 14.5%. The share price is up 15.7% over the past year and 85.5% for the past five years. Mueller shares sank in March 2020 to the $20 range but climbed steadily since then; the 52-week share price topped $63 at the close of 2021 and into 2022.
The price-earnings ratio is 5.95. That is significantly lower than competitors’ average price-earnings ratio of 14.56. It is even lower than the average price-earnings ratio of 13.7 Mueller had for the past five years.
Mueller's shares are a bit more volatile than the market with a one-year 1.24 Beta.
The consensus among Wall Street analysts is a strong buy. Mueller is on a list that pinpoints 30 “Top small-cap M&A candidates” this month. I believe a reasonable price target over the next 12 months is $100..
Shiny like sunlit copper
There is not much news coverage of Mueller. Trading volume is relatively light. Nevertheless, I believe all signs point to this being a healthy company with a solid outlook. Mueller is growing, and investors should think in the long-term. Earnings are up nearly 40% over the past five years and 232% over the past year. The company paid off nearly all its debt over the past five years.
The company has plowed along for 105 years, through recessions and good times, pandemics and inflation in the face of supply chain barriers, and still manages to impressively grow revenue and profits. Sentiment is mostly bullish, and the dividend appears safe.
Copper is the third most commonly mined metal in the world and so widely used that the future growth potential of Mueller is near guaranteed in the long term, in my opinion, as long as it has copper to mine for. If the economy does slow down, I believe Mueller can still do well because expenses are under control, management is strong, assets exceed liabilities and the company is profitable.