(By Balaseshan) Brean Capital analyst Michael Gaugler said his view is that Mueller Water Products Inc. (NYSE: MWA) is well positioned for future growth with major end market demand strengthening. The brokerage maintained its "Hold" rating based on valuation.
Gaugler said MWA's 1Q results were mixed. Revenue growth exceeded consensus forecasts, while loss per share was wider than expected. The company's fiscal first quarter is typically seasonally weak, so he isn't reading too much into the results in terms of future expectations.
The company continued to strengthen its balance sheet, as long term debt fell $22 million versus 4Q-2012, the analyst noted. With $74 million in cash at quarter-end, Mueller is well positioned to continue reducing its debt load going forward.
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The brokerage lowered its 2013 EPS estimate to $0.22 from $0.26 to reflect the differential between its 1Q-2013 forecast and the actual result, while maintaining its 2014 estimate of $0.34.
Although MWA's bottom line results fell just shy of expectations, Gaugler's investment thesis remains unchanged. Mueller's key end markets (new residential construction and municipal repair and replacement) continue to improve, as evidenced by improving volumes across the Mueller Co segment's major product lines.
New home construction permits have been steadily improving, and municipal budgets are benefiting from higher tax receipts as the U.S. economy slowly recovers, the analyst noted.
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As earlier mentioned, MWA continues to be opportunistic in terms of removing high cost debt with its free cash flow, and Gaugler believes margin improvements in the Mueller Co segment will continue as volumes increase.
The analyst's main concern is valuation; with the shares trading at almost 18 times his 2014 EPS forecast of $0.34, he sees them fairly valued at current levels. For the moment, he will await the next catalyst or more attractive valuation before recommending accumulation.
MWA is trading down 1.99% at $5.92 on Wednesday.