Few investors have Mueller Industries, Inc. (NYSE: MLI) on their watchlists but this unassuming company is a $4.7 billion juggernaut in the copper, brass and aluminum industry.
Although it’s been around for over a century, it has sprung onto investors’ radars more recently as a result of its robust financials and broad revenue diversification across products that range from HVACs to refrigeration and from plumbing to valves.
At a glance, you could think of Mueller Industries as an essential supplier in applications spanning from residential construction to industrial operations.
So, what makes Mueller worthy of your consideration?
What Makes Mueller Industries Special?
Despite its 100+ year old history it wasn’t until this past decade when Mueller Industries shined really brightly, managing to almost double revenues from $487 million to $819 million. Clearly, Mueller has benefitted from the heightened demand in the construction and industrial sectors.
Not only has the top line been growing at a rapid pace but the gross margin has been climbing steadily too. Back in 2013, gross margins were around 13% whereas now they sit closer to 29%, a full 100% plus increase. That shows Mueller enjoys pricing power on its goods that is generally evident of an economic moat, which we’ll explore more later.
It’s clear that operating expenses are under control too. While revenues are up almost 2x, SG&A costs have risen by a comparably lower 50% from $35.8 million in Q4 2013 to $48.1 million last quarter.
Total operating expenses mirror that pace of increase and are up from $44.6 million to $64.6 million over that same time frame.
It’s no surprise to learn that with gross margins up by over 2x, revenues climbing by nearly 100% and operating expenses rising by “just” 50%, or thereabouts, that quarterly operating income has soared from $21.3 million to $176.2 million in the intervening decade.
Paired with an impressive P&L statement is a sturdy balance sheet that has seen cash rise from $311.8 million to $979.8 million in the past ten years. Better yet, long-term debt has fallen from $206.3 million to just $1.3 million.
Low debt, lots of cash and a fortress balance sheet has combined to position Mueller with the financial flexibility to withstand all sorts of economic booms, as well as upheavals.
As we alluded to, it seems like Mueller is a gem in the industrial sector that enjoys a moat but is there any tangible evidence or metric to confirm that suspicion?
Does Mueller Industries Have an Economic Moat?
When investors think of moats, they can come in many forms. For example, Walmart has a low-cost advantage because its bargaining power with suppliers is so large that it can command deals most distributors or retail chains cannot. The Walton’s conglomerate has the purchasing power to distribute any given supplier’s product nationally, and so sellers are willing to discount their goods in order to secure distribution through Walmart.
But what could an economic moat look like for Mueller?
The firm’s diversified product line is one example of its moat because it can serve numerous sectors, thereby reducing reliance on any single market. A rival will struggle to quickly enter all the markets Mueller enjoys a position in now, so the latter has a fortress to some extent that cannot be easily penetrated by peers.
Mueller’s strong distribution network also serves as a moat because it has built strong customer relationships over decades that also cannot be easily dis-intermediated by competitors. Those partnerships are, in part, forged by customers’ trust in the quality of products Mueller manufactures, offering another competitive edge.
When you combine these factors together, they are evident in Mueller’s return on invested capital, or ROIC, which sits at an astounding 30.0%. For reference, the S&P 500 average firm has a ROIC closer to 10%.
A return on invested capital that is approximately 3x higher than the market average suggests Mueller has a competitive advantage, but is it sustainable?
Is Mueller Industries Stock Undervalued?
According to analysts, Mueller Industries stock is undervalued by 29.7% with a price target of $50 per share.
For MLI share price to hit that level, continued investments in infrastructure and construction are needed as these sectors are key drivers of demand for the firm’s products. Management needs to look abroad too for additional growth and new markets to further boost revenues.
The future does look bright, however, and a discounted cash flow forecast analysis is even more optimistic than analysts’ estimates, pegging fair value at $53.71 per share, corresponding to a 30.8% upside opportunity.
Some of the potential hazards on the horizon for the firm, however, include pricing changes in copper and aluminum, key source metals for the firm. And it almost goes without saying that end-market contraction as a result of economic downturns threaten to hurt revenues too.
One key metric to offer solace to investors now is the Mueller’s price-to-earnings ratio that sits at a modest 7.5x, confirming that there is a large margin of safety in spite of the recent run-up in share price.
Is Mueller Industries Stock a Buy?
Mueller Industries is a buy at this time according to analysts estimates, a discounted cash flow forecast, and a price-to-earnings ratio comparable analysis.
The merits of the stock extend beyond an attractive income statement and balance sheet to include a high return on invested capital that is indicative of a moat.
With a history of growing its top line, gross margins, and operating income, a dividend yield of 1.44% and a history of strong profitability, Mueller is a company that a conservative investor can feel quite comfortable owning.
The lack of share price volatility for the most part and strong return over the past half decade further cement the investment thesis that Mueller Industries is likely a good investment over the long-term.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.