Streetwise
Lauren Rudd
Sunday, November 1,
2009
Some Times I Am Right and Wrong
Occasionally I am right and wrong and it is a wonderful
feeling. How can I be both you ask? The answer is of course a bit of a play on
words. A year ago I talked about a company I had never mentioned before but one
that appeared to have an excellent future. Although its name is Badger Meter
(BMI), the company has no connection to the nocturnal carnivorous mammal of the
same name.
Yet, it does resemble the Wall Street bull. When many on Wall
Street were crying the blues I had a 12-month target price on Badger’s shares of
$26, for an annual gain of 11.7 percent over a price back then of $23.28. In
addition there was a 1.80 percent dividend yield.
The shares recently closed at $38.70 for a one-year annual
gain of 66 percent. My earnings estimate at the time was $1.55 per share and
$1.75 per share for 2009. The company earned $1.69 in 2008. In other words, I
was wrong in that I dramatically under estimated the company’s potential.
I mention this not to gloat over my degree of luck or skill;
take your pick, but rather to refute a recent article touting the performance of
bonds over stocks. The article was correct in stating that the Dow Jones
industrial average has crossed the 10,000 level more than 20 times since 1999.
And yes there are times when you want your portfolio to be
more heavily weighted in bonds and cash than in stocks. This is called asset
allocation and the determination should be made on a monthly or quarterly basis.
How you select an optimum allocation will be the subject of future columns.
Asset allocation aside, the performance of a major stock
index has little to do with the performance of your portfolio and nothing to do
with the performance of a particular company, as was clearly evidenced by
Badger.
Achieving the overall bond returns stated in the article
requires that you use bonds as a vehicle with which to capture capital
appreciation. That is not why most people invest in bonds. In actuality, they
are looking for the steady interest income and often hold bonds to maturity.
Furthermore, trading bonds can be both tricky and expensive. Bond index funds
solve some of the problems but create others.
Looking ahead to 2010, I can practically guarantee that the
Fed will push interest rates higher. When that happens, the inverse relationship
between bond prices and interest rates means that bond prices will fall.
All of which brings us back to Badger, a company that was
established in 1905 and manufactures a variety of measuring devices, including
drive-by utility meters that make in-person meter readings a thing of the past.
In its third quarter ended Sept. 30 earnings announcement,
the company reported that sales fell 12 percent to $60.8 million. However, net
income from continuing operations came in at $0.47 cents per share, as compared
to $0.39 cents per share a year ago.
The company’s gross profit margin for the quarter was 39
percent, as compared to 34 percent for the prior year. Selling, engineering and
administration expenses decreased 8.2 percent and 4.1 percent year-to-date,
reflecting the impact of cost-containment programs
The company recently announced a contract to supply its
radio-frequency products for gas meters to Duke Energy. It was the company’s
first major win in the natural gas utility market and gives it a solid foothold
for further expansion in the natural gas arena.
The intrinsic value of the shares, using a discounted earnings model, is $61,
while the more conservative free cash flow to the firm model produces an
intrinsic value of $46. I am raising my earnings estimate for 2009 from $1.75 to
$1.85, with an estimate of $1.95 per share in 2010. My 12-month target price on
the stock is $44, for a capital gain of 15 percent. In addition, there is a
current indicated dividend yield of 1.3 percent. The company has raised
dividends for 16 consecutive years.
