AI has applications in almost every industry of the economy, including water management.
For more than a century, Badger Meter has helped water utilities and their customers become more efficient in their water use.
“Smart water” technology promises great benefits for the company and its shares.
10 stocks we like better than Badger Meter ›
Technology stocks have been the focus of many investors, and rightly so. Its performance over the past 15 years has been exemplary, crushing long-term market averages and outperforming other sectors of the stock market. However, smart investors have begun to realize that the benefits of technological innovation will not only flow to technology-oriented companies, but also to companies that wear that innovation to further their own business aspirations.
badger meter (NYSE: BMI) is a great example of how this phenomenon is developing. You could be forgiven for not being familiar with Badger and its legacy of water meters and measuring equipment. But if you’re looking for less obvious ways to invest in companies that will benefit from artificial intelligence and advanced automation technology, it’s worth taking a closer look at Badger.
The first article in this series on Badger Meter focused on the history of this century-old business and the ways it has evolved over the years. Today, this article focuses its attention on how Badger has turned its water management expertise into significant financial growth.
Image source: Getty Images.
Badger’s strategy has focused on the need for water companies and commercial users to take greater control of their water use. For utilities, older mechanical water meters become less accurate over time, resulting in lost revenue. Additionally, newer meters can detect leaks and remotely handle tasks that previously required physically traveling to customer locations, such as meter readings and service outages.
Badger’s new solutions include cellular radios that connect with monitoring software to provide stakeholders with much greater capabilities. In addition to savings from handling key tasks remotely, improved data informs analysis that encourages conservation and provides actionable insights.
It’s still early days for the smart water movement, but Badger has already seen growth rates increase in response to its improved technology. Since 2020, revenue has more than doubled. The company has generated average annual gains of 28% in recurring revenue from its subscription-based monitoring software platform. Badger specifically cites increased adoption of its smart water solutions for those favorable trends, both from cellular communications capabilities and network monitoring for water quality and pressure.
Technology adoption has also been good for Badger’s financial efficiency metrics. After the initial capital outlay to build its network, Badger can attract new customers with very little additional cost. This has reduced the amount of working capital the company needs to generate sales, and operating profit margins have increased from less than 15% in 2019 to almost 20% in the last 12 months. Profits have nearly tripled since 2019 and Badger is generating impressive amounts of free cash flow that it uses for various purposes, including internal investments and strategic acquisitions. Shareholders have also seen direct benefits from Badger’s growing business, as dividends per share have barely doubled since 2022.
Some forward-thinking investors recognized early the impact Badger Meter’s change in strategy could have on their finances. The company’s stock price more than tripled between mid-2022 and the end of 2024. The stock moved further toward all-time record territory before suffering a 30% pullback over the past six months.
Based on retrospective figures, concerns that Badger shares have gotten ahead of themselves are not unfounded. Earnings multiples topped 40 before the recent pullback. Even now, shares are trading at valuation levels above their historical norms.
However, there’s a good argument that Badger still has enough future growth to justify the share price at the current level. In tomorrow’s third and final Badger article, you’ll see more about how the company is fueling growth and why its management is more optimistic than ever about the prospects for smart water technology.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This Promising Water Reservoir Has Big AI Aspirations was originally published by The Motley Fool
