BB&T is upgrading their rating on Mueller Water Products (NYSE:MWA) to Buy from Neutral:
Upgrading to Buy (1). We believe the long-term story remains attractive, and the near-term outlook is showing notable signs of improvement. While the market is currently discounting both a potential housing bottom and further significant erosion in nonres construction, we believe the outlook for both markets will improve over the next year or so. Concerns remain, to be sure, as evidenced by the depressed stock price, but we expect fundamentals to start to improve going forward, pushing EPS and the stock price considerably higher. Simply put, we’ve seen enough stabilization to rule out a dire scenario, and believe we’ll miss it if we wait for confirmation of a housing and nonres rebound. As such, we are upgrading to Buy (1) from Hold (2) and initiating a $6.00 price target.
Solid long-term story. We believe the long-term outlook remains bright, based in large part on (1) huge water infrastructure demand estimated at $335B over 20 years, and (2) MWA’s leading positions in oligopoly markets with solid barriers to entry.
Near-term outlook improving in many ways. Business conditions remain incredibly challenging, and we are not calling for a quick return to growth. However, we are encouraged near-term by (1) stabilization in the water infrastructure and housing markets, (2) significant under absorption and raw material headwinds abating, (3) pricing holding up and easy volume comps coming, and (4) solid FCF and further de-levering despite the worst macro conditions in memory.
EPS power. MWA sees 20% EBITDA margins under more normal conditions, which won’t likely be “normal” until 2012, when housing and nonres should be much more robust. We estimate that MWA could generate EPS power of close to $1.00 assuming a 20% EBITDA margin, or $0.65 using a more conservative 17% margin. We typically wouldn’t discount potential EPS power that far out, but we see value in a $3.73 stock with the potential for $1.00 in earnings.
Action: Long story short: forgotten stock trading at less than $4, near-term improvements, good long-term story, $1 EPS power - good enough in my book for a buy. Would expect the stock to trade above $4 today.