Back in May, I wrote about my bull case for Mueller Industries Inc. (MLI, Financial), but at that time, I still retained some caution due to the lackluster economic outlook. As a miner, Mueller's stock price tends to closely align with the health of the overall economy.

Now that we've gotten a good picture of second-quarter results across companies, sectors and the economy in general, though, I believe the economic outlook might be better than it appears. Moreover, since Mueller is a little fish relatively speaking, its volatility could benefit investors more on an upswing in my opinion.

About Mueller

Mueller specializes in copper and copper alloy manufacturing. It also produces goods made from aluminum, steel and plastics. Headquartered in Collierville, Tennessee, it primarily manufactures tubing, fittings, valves, vessels and other items for plumbing and HVACR piping. It also manufactures rods, forgings, extrusions and various other components for OEM applications. Its products are used in the construction, appliance, water distribution, defense, energy and automotive industries.

An improving outlook

This industry is the backbone of the American economy. Mueller and many of its peers are experiencing short-term downward pressures and waning investor confidence in reaction to fears of lower future revenue and earnings. Many analysts are warning investors about rising inflation and the threat of recession. News headlines talk about the retrenchment of gross domestic product, spreading fear among investors. The SPDR Dow Jones Industrial Average ETF (DIA, Financial) is down about 12% for the year. Shares of Mueller Industries are increasingly volatile in reaction to the uncertainty. The Beta rating stands at 1.07.

Meanwhile, U.S. corporate profits hit a record high in the second quarter of 2022. Mueller Industries’ shares are up about 41% for the year. The company’s second-quarter GAAP earnings per share were reported in July to be $3.65. Revenue jumped almost 14% year over year for the second quarter. The next earnings are expected to be reported on Oct. 17.

The industrial sector is closely knit to the larger economy. Slowdowns result in lower share prices. Despite analysts' fears of a weakening economy, I see more potential for industrial producers like Mueller compared to some other sectors at this time because I believe things aren't as bad as the headlines are trying to make it seem.

Scattered data in recent months suggests sales of industrial goods might be stalling, according to the Federal Reserve. However, the Federal Reserve also reports there was an uptick of +0.6% in industrial production for July when Mueller’s stock popped. Motor vehicle production rose 6.6%. “Total industrial production in July was 3.9% above its year-earlier level,” the Fed reported.

According to GuruFocus data, Mueller's stock is up a cumulative 183.29% for the past 10 years, so as long as the economy eventually recovers, the outlook for Mueller is bright.

Valuation

In May, corporate insiders were buying shares of Mueller. However, they sold about $200,000 worth of shares over the last three months, as the share price climbed to $66. Concomitantly, hedge funds increased their holdings by almost 80,000 shares. Fourteen funds owned shares of the stock in 2021, while 19 own the stock in this quarter, as of the most recent 13F reports.

GuruFocus rated Mueller’s share buyback ratio “average” for this industry over the last 10 years. Management became more aggressive in share buybacks over the past three years. Now Mueller rates better than average in the industrial products sector.

The forward dividend yield is 1.6%; that is in line with the industry average, but much higher yields are available elsewhere in the sector.

The price-earnings ratio stands at 5.78. The company boosted its cash and equivalents last quarter to $202.5 million. It has zero net debt, excluding capital lease obligations. Mueller boasts a healthy balance sheet in these worrisome times, which is promising.

Though Mueller gets a high GuruFocus ranking for profitability, growth and financial strength, but its momentum is weak and the valuation is mediocre. The GF score for Mueller is 88 out of 100.

The GuruFocus Value chart assigns a value of $58.14 to the stock.

There are some headwinds that Mueller faces. First, if the economy slows in the third quarter, as the Philadelphia Fed and many other analysts predict, the GDP might increase only 1.4% instead of 2.5%. Mueller’s EPS will be probably be reported in the mid-$2 range if that scenerio occurs, by my estimates.

Second, if unemployment rises and inflation holds for two quarters at over 6%, Mueller's shares might languish in the $58 range for the next six months. Over the next 12 months, I have a price target of $85 for this stock, representing an increase of around 25%, but only if the economy strengthens.