My base case valuation for this stock, at $30 per share, is based on the company achieving one-half of the margin improvement targeted by management. The stock recently traded at $13.74, down from a 52-week high of $36 per share. Investors in this stock will not have to wait long to see a rebound in operations. Numerous internal initiatives, such as expansion of higher-margin private-label offerings and sourcing of product to China, are already well under way.
Mueller Water Products (MWA.B): There are a number of facets to this story that are certain or near certain: that Mueller Water is the No. 1 or No. 2 player in most of the water infrastructure markets in which it participates, that there are high barriers to entry in most of its end markets, and that the company has a huge installed base that drives recurring revenue (i.e, replacement parts).
The good news for investors in this stock is that the company's subnormal operating performance is almost entirely due to external factors -- about one-third of sales are linked to new residential construction. The value of this company is at least double the current stock quote. It recently traded at $8.80 per share. My model suggests a value of $22 to $24 in a couple of years.
It's worth noting that the American Society of Civil Engineers assigned a grade of D-minus to current water infrastructure. With leakage rates running as high in 20% in some areas, studies indicate that $180 billion needs to be spent over the next 20 years to fix our water infrastructure. Since I can't predict when an impetus to fix our water infrastructure will develop, I've excluded such a scenario from my valuation calculation. I mention it only because it represents significant upside to my estimates.Note that there are two classes of stock, A and B, for Mueller Water Products. While the B series has superior voting rights, I expect the classes to merge into one class in a couple of years. A tax issue related to the spinoff from Walter Industries (WLT) prevents changing the stock structure for a few more quarters. This column was originally published on RealMoney on May 19, 2008 at 1:00 p.m. EDT. For more information about subscribing to RealMoney, please click here.