Badger Meter (BMI)

Water control and measure company Badger Meter (NYSE:BMI) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 13.2% year on year to $222.2 million. Its GAAP profit of $1.30 per share was 26.4% above analysts’ consensus estimates.

Company Overview

The developer of the world’s first frost-proof water meter in 1905, Badger Meter (NYSE:BMI) provides water control and measure equipment to various industries.

Measurement and inspection instrument companies may enjoy more steady demand because products such as water meters are non-discretionary and mandated for replacement at predictable intervals. In the last decade, digitization and data collection have driven innovation in the space, leading to incremental sales. But like the broader industrials sector, measurement and inspection instrument companies are at the whim of economic cycles. Interest rates, for example, can greatly impact civil, commercial, and residential construction projects that drive demand.

Competitors offering similar products include Itron (NASDAQ:ITRI), Xylem (NYSE:XYL), and Mueller Water (NYSE:MWA).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Badger Meter’s sales grew at an exceptional 14.8% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Badger Meter’s annualized revenue growth of 20% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Badger Meter’s year-on-year revenue growth was 13.2%, and its $222.2 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 11.7% over the next 12 months, a deceleration versus the last two years. Still, this projection is commendable and implies the market sees success for its products and services.

Badger Meter’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 39.9% gross margin over the last five years. That means Badger Meter only paid its suppliers $60.15 for every $100 in revenue.

In Q1, Badger Meter produced a 42.9% gross profit margin, up 3.6 percentage points year on year. Badger Meter’s full-year margin has also been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Badger Meter has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Badger Meter’s operating margin rose by 4.7 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Badger Meter generated an operating profit margin of 22.2%, up 3.6 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Badger Meter’s EPS grew at an astounding 22.5% compounded annual growth rate over the last five years, higher than its 14.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Badger Meter’s earnings can give us a better understanding of its performance. As we mentioned earlier, Badger Meter’s operating margin expanded by 4.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Badger Meter, its two-year annual EPS growth of 36.6% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Badger Meter reported EPS at $1.30, up from $0.99 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Badger Meter’s full-year EPS of $4.54 to grow 4.4%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Badger Meter has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 15.3% over the last five years.

Taking a step back, we can see that Badger Meter’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Badger Meter’s free cash flow clocked in at $30.06 million in Q1, equivalent to a 13.5% margin. This result was good as its margin was 4 percentage points higher than in the same quarter last year, but we note it was lower than its five-year cash profitability. Nevertheless, we wouldn’t read too much into a single quarter because investment needs can be seasonal, leading to short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Badger Meter’s five-year average ROIC was 24.5%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Badger Meter’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Badger Meter is a profitable, well-capitalized company with $131.4 million of cash and no debt. This position is 2.2% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Badger Meter beat analysts’ EPS expectations this quarter despite just in-line revenue. It was also nice to see operating and free cash flow margin improve from the same quarter last year. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 1.1% to $186 immediately after reporting.

Updated: May 21, 2025 at 10:03 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Badger Meter.

Badger Meter is an amazing business ranking highly on our list. First of all, the company’s revenue growth was exceptional over the last five years. And while its projected EPS for the next year is lacking, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. Additionally, Badger Meter’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Badger Meter’s P/E ratio based on the next 12 months is 51.8x. Expectations are high given its premium multiple, but we’ll happily own Badger Meter as its fundamentals illustrate it’s clearly doing something special. It’s often wise to hold investments like this for at least three to five years, as the power of long-term compounding negates short-term price swings that can accompany high valuations.

Wall Street analysts have a consensus one-year price target of $230.16 on the company (compared to the current share price of $243.68).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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