Mueller Industries: A Small F

In May, I wrote about my bull case for Mueller Industries Inc. (IML, financial), but at that time I was still cautious due to the lackluster economic outlook. As a miner, Mueller’s stock price tends to align closely with the health of the overall economy.

Now that we have a good idea of ​​the second quarter results in companies, sectors and the economy in general, I think the economic outlook could be better than it looks. Also, since Mueller is a small fish relatively speaking, his volatility could benefit investors more during a rally in my view.

About Muller

Mueller specializes in the manufacture of copper and copper alloys. It also produces aluminum, steel and plastic goods. Based in Collierville, Tennessee, it primarily manufactures tubing, fittings, valves, vessels, and other items for HVACR plumbing and piping. It also manufactures rods, forgings, extrusions and various other components for OEM applications. Its products are used in the construction, appliance, water supply, defence, energy and automotive sectors.

Improving prospects

This industry is the backbone of the US economy. Mueller and many of his peers are facing near-term downward pressure and a loss of investor confidence in response to fears of lower future revenue and earnings. Many analysts are warning investors of rising inflation and the threat of recession. Headlines speak of shrinking gross domestic product, sowing fear among investors. The SPDR Dow Jones Industrial Average ETF (IAD, financial) is down about 12% for the year. Mueller Industries shares are increasingly volatile in response to uncertainty. The beta rating is 1.07.

Meanwhile, U.S. corporate profits hit a record high in the second quarter of 2022. Shares of Mueller Industries are up about 41% for the year. The company’s second-quarter GAAP earnings per share were reported in July at $3.65. Revenue jumped nearly 14% year over year in the second quarter. The next results are expected to be released on October 17.

The industrial sector is closely linked to the economy as a whole. Downturns lead to lower stock prices. Despite analyst fears of a weaker economy, I see more potential for industrial producers like Mueller compared to some other sectors right now because I think things aren’t as bad as the headlines. try to make it believe.

Scattered data in recent months suggests that sales of industrial goods could stagnate, according to the Federal Reserve. However, the Federal Reserve also reports that there was a +0.6% rise in industrial production in July when Mueller’s stock surged. Motor vehicle production rose 6.6%. “Total industrial production in July was 3.9% above its level a year earlier,” the Fed reported.

According to data from GuruFocus, Mueller shares are up 183.29% over the past 10 years, so as long as the economy eventually recovers, the outlook for Mueller is bright.

Evaluation

In May, company insiders were buying shares of Mueller. However, they have sold about $200,000 worth of shares in the past three months as the stock price climbed to $66. At the same time, hedge funds increased their holdings by almost 80,000 shares. Fourteen funds held shares of the stock in 2021, while 19 held the stock this quarter, according to the latest 13F reports.

GuruFocus called Mueller’s buyback ratio “average” for this industry over the past 10 years. Management has become more aggressive in share buybacks over the past three years. Now, Mueller ranks better than average in the industrial products sector.

The forward dividend yield is 1.6%; this is in line with the industry average, but much higher yields are available elsewhere in the sector.

The price/earnings ratio stands at 5.78. The company increased its cash and cash equivalents last quarter to $202.5 million. It has zero net debt, excluding capital lease obligations. Mueller is showing a healthy record in these worrying times, which is promising.

Although Mueller earns a high GuruFocus ranking for profitability, growth and financial strength, but its momentum is weak and the valuation is poor. The GF score for Mueller is 88 out of 100.

The GuruFocus value chart assigns a value of $58.14 to the stock.

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There are headwinds that Mueller faces. First, if the economy slows in the third quarter, as the Philadelphia Fed and many other analysts are predicting, GDP may grow only 1.4% instead of 2.5%. Mueller’s EPS will likely report in the $2 range if this scenario occurs, based on my estimates.

Second, if unemployment rises and inflation holds for two quarters above 6%, Mueller shares could languish in the $58 range for the next six months. Over the next 12 months, I have a price target of $85 for this stock, which is about a 25% increase, but only if the economy strengthens.

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