About the company
Muller Industries (MLI, Financial) manufactures a diverse range of products, including copper, brass, aluminum and plastic products such as valves, fittings, tubes, faucets, impact extrusions and flexible duct systems. The company operates through three key segments, each contributing to its overall revenue composition.
The Piping Systems segment holds the largest share, accounting for 68% of the total revenue. This segment focuses on the production and distribution of copper tubes, fittings, line sets and pipe nipples, catering to various industries and applications.
The Industrial Metals segment, comprising 16% of the total revenue, specializes in manufacturing brass rods, impact extrusions, forgings, specialty copper and aluminum tubes.
The Climate segment, also contributing 16% to the total revenue, focuses on the production of valves and fittings, high-pressure components, insulated HVAC flexible duct systems and line sets.
In the first quarter of fiscal year 2023, Mueller Industries reported a 3.8% year-over-year decrease in revenue, with the top line amounting to $971.2 million. This figure surpassed the consensus estimate of $909 million, indicating better-than-expected performance. The decline in revenue was primarily attributed to lower unit volume in international mill businesses. However, this impact was partially offset by increased net sales in downstream businesses, which typically offer higher value-added content.
Despite the overall decrease in revenue, Mueller Industries managed to improve its operating margin by 250 basis points to 23.6% during the quarter. This improvement was driven by lower copper prices and reduced inflation across other raw materials, which positively impacted the company's cost structure. Notably, the average price of COMEX copper during the first quarter of 2023 stood at $4.09 per pound, representing a 10% decrease compared to the same period in 2022.
Revenue analysis and outlook
The residential market experienced a notable surge in demand during the latter half of 2020, primarily fueled by lower mortgage rates and the housing shortage. This trend continued into 2021, benefiting Mueller Industries' revenue growth and overall performance.
Within the building construction sector, Mueller Industries generates approximately 84% of its revenue. The company's exposure to this sector is primarily through new construction in the residential segment, accounting for 44% of the total building construction revenue. In 2021, new home starts witnessed a substantial increase of 16% owing to pent-up demand and favorable mortgage rates. However, in 2022, new home starts experienced a decline of 3% due to higher home prices and the Federal Reserve's interest rate hikes aimed at curbing inflation. This decline persisted until April 2023, impacting Mueller Industries' revenue performance in the first quarter of that year.
Mueller Industries also generates 44% of its revenue from the Commerical market. Commercial construction experienced a period of weakness in the first half of 2021, largely driven by the work-from-home trend. However, in the latter half of 2021 and the beginning of 2022, commercial construction rebounded as offices reopened. Nevertheless, demand in the commercial construction sector started to wane in mid-2022 due to rising interest rates and inflation. The Architectural Billing Index (ABI), a leading indicator of commercial construction, has exhibited a decline since October 2022 and was below 50 by April 2023, indicating a moderation in the commercial sector.
Looking ahead, I believe that Mueller Industries' revenue in 2023 will be lower compared to 2022 due to a moderation in demand from both the residential and commercial sectors. Affordability concerns and higher interest rates will pose challenges for residential construction, while the declining demand in the commercial sector will impact the company's commercial business. Although Mueller Industries enjoyed the benefits of robust demand and pricing actions in 2021 and 2022, this favorable trend is beginning to fade, and the company's revenue is anticipated to normalize in 2023.
Margin outlook
Mueller Industries has witnessed a significant improvement in its margins over the past six quarters, with an approximate increase of 600 basis points in the operating margin to reach 23.6% in the first quarter of 2023. This remarkable margin growth can be attributed to several factors. Most notably, the strong demand observed in the residential market, coupled with inflationary pressures and industry-wide supply chain constraints, resulted in higher selling prices for Mueller Industries' products. This boost in prices positively impacted the company's margins.
Looking ahead, I believe that Mueller Industries' margins will continue to benefit from the moderation in inflationary pressures. The price of copper, which serves as the primary raw material for the majority of the company's products, has notably decreased from its peak levels in 2022. This decline in copper prices should contribute to margin improvement. However, it is important to note that the volume declines expected in 2023 may offset some of these margin benefits. Furthermore, the tornado damage sustained by Mueller Industries' factory in Covington, Tennessee towards the end of the first quarter of 2023 will have an impact on the company's operations. However, Mueller Industries has proactively taken measures to address this challenge. The company is currently in the process of rebuilding the factory and has implemented contingency plans, such as utilizing other factories and third-party outsourcing arrangements, to ensure continued supply to its customers. These efforts should mitigate the negative impact on margins caused by the temporary disruption in production.
Overall, while Mueller Industries has experienced significant margin growth in recent quarters, the company is mindful of potential volume declines in 2023. However, the moderation in inflationary pressure and the management's strategic actions to address challenges, including the tornado damage, should help sustain favorable margins for the company in the future.
Valuation
Using the relative valuation method, Mueller Industries looks cheap compared to its historical average and its peers. The stock is currently trading at a forward price-earnings ratio of 11.37 based on analysts' consensus earnings per share estimate of $7.10. The forward price-earnings ratio rises a bit to 11.96 when looking at the 2024 consensus EPS estimate of $6.75, which is still slightly below its five-year average forward price-earnings of 12.69. The company is trading at a significant discount compared to its peers Watts Water Technologies (WTS, Financial) and Kaiser Aluminum Corporation (KALU, Financial), which are trading at forward price-earnings ratios of 24.40 and 26.35, respectively.
Conclusion
I predict Muller Industries’ revenue in 2023 will be impacted by lower housing starts as a result of declining demand caused by rising interest rates and affordability concerns. Additionally, commercial construction is also expected to decline due to lower demand, which could be witnessed in lower ABI levels. The moderation in raw material costs is expected to benefit the margins in 2023. However, given the fair valuation compared to its history and the negative revenue growth outlook, I think it is prudent to remain on the sidelines with this stock for now.
