It's been a long time since I've published updated thoughts on Mueller Water (NYSE:MWA). I wasn't very bullish on the shares back in 2016, largely due to what I thought were inflated expectations for municipal water investment/capex spending and the Technologies segment, as well as overly ambitious expectations for margin leverage. Since then, the shares have underperformed the broader industrial group by about 30% and the S&P by about 50%, as well as more water-focused peers like Evoqua (AQUA), Watts Water (WTS), and Xylem (XYL).
I'm relatively bullish on the outlook for residential construction, including land development, and I like the company's decision to reinvest in its manufacturing base to drive stronger long-term margins. What I don't like is how much of the valuation still seems to depend upon governments at all levels (municipal, state, and federal) making smart decisions, doing the right things, and finding the funds to reinvest in upgrading critical infrastructure assets like water. I'm also still quite skeptical of the Technologies business - while products and services like monitoring software and leak detection should be popular, something is clearly not working in this business, as it hasn't produced meaningful growth in five years.
Mueller doesn't look particularly attractive on cash flow, though my model reflects my own pessimism that needed infrastructure spending will happen. Relative to Mueller's margins, ROIC, and so on, though, the shares do look undervalued.
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