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Mueller Water Products Inc. (NYSE: MWA)

Mueller Water Products Inc. (MWA) manufactures and markets various water infrastructure and flow control products for use in water distribution networks and facilities in the United States and Canada. The Company’s product portfolio includes engineered valves, fire hydrants, pipe fittings, water meters and ductile iron pipe, which are used by municipalities, as well as the commercial and residential construction, heating, ventilation and air conditioning, fire protection, and oil and gas industries.

MWA operates through three business segments: Mueller Co., U.S. Pipe and Anvil. Mueller Co. manufactures and sells fire hydrants, valves and related products used in residential water and gas systems. U.S. Pipe manufactures and sells ductile iron pipe, restrained joint products, fittings and other products. Anvil manufactures and sells pipe fittings, couplings, pipe hangers, pipe nipples and related products.

Based in Atlanta, Georgia, the Company employs approximately 5,300 people.

*year-ending September, 30.

Source: Reuters.com, SEC Filings.

Financial Summary

The Company’s net sales for the three months ended June 30, 2009, were $363.2 million compared to $528.5 million in the prior year period. Net sales decreased $176.0 million due to lower shipment volumes and unfavorable changes in Canadian currency exchange rates. Gross profit for the three months ended June 30, 2009, was $57.8 million compared to $123.4 million in the prior year period. Adjusted loss from operations for the 2009 third quarter was $4.6 million, a decrease of $58.4 million from the 2008 third quarter.

Results were negatively impacted by significantly lower shipment volumes and considerably higher per-unit overhead costs on products sold due to lower production. Net loss per share was $0.16 for the 2009 third quarter compared to net income per share of $0.18 for the 2008 third quarter.

MWA had cash and cash equivalents of $80.1 million at June 30, 2009, and $157.1 million of unused capacity under the revolving credit facility component of 2007 Credit Agreement as amended in June 2009. At June 30, 2009, the Company had borrowing capacity of approximately $55 million available to it. Operating activities provided $68.3 million and $105.9 million of cash during the nine months ended June 30, 2009, and 2008, respectively.

Source: Yahoo! Finance, SEC Filings.

During the 2009 quarters, the Company’s stock began trading at prices significantly lower than prior quarters, especially in the second and third quarters. In July, the stock took an upward trend and it currently trades at around $5.50. Over the last 52 weeks the stock has ranged from a low of $1.48 to a high of $8.55.

Analyst Consensus

Source: http://markets.ft.com/tearsheets/analysis.asp?s=MWA

Investment Highlights

MWA’s products enjoy leading positions due to their broad brand recognition and a reputation for quality and service for the customers it serves. The Company has one of the largest installed bases of iron gate valves and fire hydrants in the United States, and presently installed products include approximately 3 million fire hydrants and approximately 10 million iron gate valves. Because of the strength of its brands and products, MWA’s products are specified for use in 99 of the top 100 metropolitan areas in the United States.

Due to severe economic conditions, the demand for MWA’s products has been very depressed. Shipments into the residential construction market have been minimal in the past three quarters. The Company also saw an accelerating drop in demand from non-residential construction market. In addition, MWA expects that prices could continue to deteriorate in the next quarter. However, the Company considers that demand in water infrastructure markets has already hit its low point and should experience a slow recovery. Moreover, concerning municipal spending, the Company expects to see positive movement in this segment as the American Recovery and Reinvestment Act spending for drinking water may soon begin to make its way into the market.

In response to the downturn in the economy and its impact on MWA’s markets, the Company implemented a number of cost-saving actions. Thus, the Company implemented headcount reductions and restructured certain manufacturing operations at U.S. Pipe North Birmingham manufacturing facility to reduce capacity and lower the breakeven point. Also included in the implemented actions were temporary plant shutdowns, reductions of 20% for members of the Company’s board of directors and most of its executive officers. MWA also announced lesser reductions in base pay and/or reduced workweeks for other salaried employees. The reduction of overall cost structure is called to enhance the Company’s earnings power, when demand in its markets improve.

In the past century, worldwide water usage has jumped 700%, more than double the rate of population growth, while the water supply has not much changed. According to American Rivers, water infrastructure in the United States is deteriorating and needs a major overhaul to avoid further declines in clean water supplies and to deal with the more extreme weather that is coming with global warming. Moreover, capital expenditure on crucial water infrastructure projects in the U.S. has been cut back by 12.9% over the past few months due to restraints on borrowing, shrinking tax bases and a drop in capital contributions from property developers, according to Global Water Intelligence. Still, the long-term market for water infrastructure upgrade and rehabilitation remains strong, the report noted, with capital expenditure expected to grow from $25.2 billion in 2009 to $49.7 billion in 2016. In fact, the Environmental Protection Agency recently estimated that $374 billion will be needed over the next 20 years for water main replacement and renewal.

The Company is dependent upon residential and municipal water infrastructure construction activities. About 170,000 companies build or renovate homes in the United States, with combined annual revenue close to $500 billion. Residential market drivers are now balanced with the number or improving indicators now about the same as the number still worsening. In the last months, the housing market has begun to expand due to near record high home affordability and taxpayer subsidies for buying new houses. These are temporary boosts, which could ebb in the next few months, but they are sufficient to get a sustainable recovery underway.

The Company amended its 2007 Credit Agreement in June 2009. The amendment provides more financial covenant flexibility and, among other things, resulted in increased interest rates and new financial covenants. MWA repaid $126.5 million of debt in the third quarter. Unamortized deferred financing fees of $2.3 million that existed prior to the amendment were written off and financing fees of $9.9 million related to the amendment were capitalized and will be amortized over the remaining life of the amended credit agreement.

In September 2009, MWA completed its previously announced offering of 32,280,000 shares of its Series A common stock and that underwriters for the offering have exercised in full their option to purchase an additional 4,842,000 shares of its Series A common stock. The net proceeds from the offering to the Company were approximately $165.9 million. The Company is using all of the net proceeds from the offering to repay a portion of indebtedness outstanding under its credit agreement on a pro rata basis between the Term A loan and the Term B loan.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

MWA is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

The MACD for MWA currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

The Company has been relatively stable recently. This is evidenced by the width of its Bollinger Bands, which are tighter than normal. Additionally, MWA is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

MWA is traded with significant discount to peer P/S multiples due to lack of profitability.

MWA is continuing to take aggressive actions to reduce its manufacturing capacity and the overall costs in its businesses. The Company’s management intends to take additional actions to address the impact the recession has had on the business and as such, MWA could experience a slow recovery over the next months.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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