Don't Be Fooled By Badger Meter's Rise, There's More To Go

Badger Meter NYSE: BMI stock is risng by as much as 6.2% during Thursday's trading session; markets are beginning to react to the set perceptions in the company, especially after reporting massively bullish second quarter 2023 earnings results.

Investors today are celebrating a rare occasion, and that is the fact that the market's perception toward the stock is as strong as ever, creating a reasonable cause for analysts to push their current price targets higher than they are today.

Despite the stock breaking a new all-time high record of $158 per share due to the quarterly results, there are plenty of fundamental reasons to believe the actual ceiling is slightly higher.

Gangbusters Quarter, Markets Smiling Back

With double-digit growth rates across the board, Badger Meter is making its way to the top of the list for attracting investors to its stock. Blowing past competitors like Itron NASDAQ: ITRI and Cognex Corporation NASDAQ: CGNX, outperforming both by as much as 57.3% during the past twelve months.

Despite the massive outperformance, markets are loving the stock still, a relationship that may aid in pushing the price above today's record highs. Investors can catch the new move before it gets underway, with nothing to scoff at.

Badger Meter analyst ratings suggest a consensus downside of nearly 11% from today's prices. However, these targets may reflect a very outdated and conservative viewpoint. The actual figures within the earnings press release may help investors understand why.

Net sales grew by as much as 28% compared to the second quarter results from 2022, a seemingly impossible feat for a company the size of Badger. Typically, as companies grow more prominent, the financial growth prospects begin to slow toward low to mid-single-digits. Therefore posting such a high revenue growth rate places Badger in a separate sphere of growth.

The exciting part for investors comes from the side effects of growing revenues at such an aggressive clip; operating profits grew by an even larger 34%, aided by a subsequent margin expansion. Trickling down the income statement, investors saw a jump in earnings per share of 33% during the period, significantly helping in the upside value thesis.

What will become more of a mind-blow to investors is where Badger Meter's earnings expectations lie for the coming months and year, especially where markets value such projections. At the same time, knowing this may help those still second-guessing a potential purchase on the hot momentum breakout in the stock.

Perception, Upside Potential 

Investors can begin to break down the thinking behind the market's perception of the stock, especially when spreading out perceived valuations via the forward price-to-earnings ratio. The forward P/E can be taken over the traditional P/E since it values the next twelve months of earnings instead of the past twelve.

Badger Meter trades at a forward P/E of 49.2x, well above Cognex's 41.9x and Itron's 30.2x. Some value investors may argue that this only makes Badger the more expensive alternative in the peer group. However, the positive outlier can subtly hint at what markets think. 

By placing a higher value on the future earnings for Badger Meter, markets essentially admit that there is higher 'quality' and growth to be had there rather than in close peers. Though there are no material figures around management outlooks as far as full-year 2023 goes, investors got a feel for what is going through the minds of leadership.

"Badger Meter is well-positioned to sustain its pattern of profitable growth enhanced by our innovative offerings..." were the words spoken by Kenneth Bockhorst, Badger Meter's CEO. For now, investors will need to rely on analyst estimates for next year's EPS, which stand to be at $2.71. 

A near 20% annual advance in EPS may be the foundation needed to fulfill the market's beliefs, which point to higher quality in Badger Meter's earnings growth relative to peers. Some may see this as wishful thinking. However, there is one more piece of advice that investors can take home and consider their possible stock purchase.

Since Badger Meter's free cash flow (Operating Cash Flow minus Capital Expenditures) was $20.1 million and the company only paid $6.5 million in dividends with no share repurchases, investors can begin to demand more benefits.

Whether that is a larger dividend payout or increased share repurchase programs, bullish expectations around financials can lead to either or, in the best scenario, both.