To The Moon

$Badger Meter(BMI)$ is a company that I've been aware of for a while, but prior to writing this report, it was also a business that I knew very little about. I first became aware of BMI as part of my linearity analysis of the S&P 600, which is the US small cap index. Since their IPO in 1985, their share price has grown more than 25,000%, often with low volatility.

Presented here is a breakdown of how I would analyse a company for the first time. Let's assume that we've never heard of this company, which for many, may have been the case. Here's a step-by-step process we could take in understanding the business further. The steps are categorised in to determining whether a company has predictable growth, pricing power and capital efficiency. At the end of each part of the analysis I provide a short judgement: ✔️ means it meets the criteria, ⚠️ means there's some ambiguity on whether it meets the criteria, and ✖️ means it doesn't meet the criteria.

Presented here is what I would look to cover in the first 1-2 hours of analysis into a company. If a company meets all the below criteria, then I would add it to my watchlist and over time would supplement the below information with additional informations from a diverse a range of sources as possible.

Predictable growth

Does Badger Meter sell to businesses or consumers?

BMI primarily sells to water utility companies and commercial organisations. They don't sell directly to consumers. I personally prefer companies that sell to other businesses (so B2B, rather than B2C). In my experience this allows for more predictable revenue and growth, as corporates typically enter into long-term contracts, have deeper pockets and are unlikely to exit contracts if there's an economic downturn, specifically if the product is mission-critical to the company.

✔️

Does Badger Meter have a concentrated or diversified customer base?

BMI has a diversified customer base, meaning that no one customer accounts for a significant share of revenue. Independent analysis indicates that no single customer contributes to more than 10% of revenue. They are also diversified globally, with installed base across over 50 countries. As an investor with a concentrated portfolio, it is important for me that a business be diversified to mitigate any risk from loss of customers - so this is encouraging to see.

Does Badger Meter sell a product or service?

BMI primarily sells products. These products include flow meters, water meters, sensors and related measurement hardware. They are durable, rather than consumable, meaning they are built to last. As an investor, I look for recurring revenue as this is the foundation of predictable growth. Unlike services and consumable products, durable products do not lend themselves to recurring revenue. This often means that in order to grow revenue, a company selling a durable product will need to rely more on volume growth than price growth.

BMI does offer software and support services. This line of business is referred to as BlueEdge. The below is taken from an investor presentation. They describe this as "high recurring revenue" and a "subscale asset primed for growth". They also provide ongoing maintenance of their installed base, which provides a further source of recurring revenue.

So while their core offering is a durable product, there seems to be potential here for recurring revenue, which may grow with time.

✔️

What drives demand for Badger Meter's products and services? Is demand cyclical (short-term) or secular (long-term)?

Demand is driven primarily by the need to replace and modernise aging water infrastructure. Demand for their water meters and infrastructure is fairly steady, since water meters are often mandated and utility companies need to replace their aging assets. This keeps demand smooth. This is a secular (not cyclical) and long-term (not short-term) demand. The need for accurate measurement and monitoring is likely to persist into the future. However, their customers' capital expenditures can fluctuate with economic conditions, which themselves impact the pace of new infrastructure projects. But overall, BMI appears to have a degree of insulation from cyclicality.

✔️

Is Badger Meter significantly reliant on physical assets to operate?

Physical assets on the balance sheet (such as property, infrastructure and equipment) often require capital expenditure to maintain and grow. Ideally a company would have low capital expenditure (i.e. it is capital light) in order to produce high amounts of free cash flow. This requires the company to have a low percentage of physical assets on its balance sheet (i.e. it is asset light). 11% of BMI's assets are physical assets, highlighting that they are an asset light business, and only 2% of their revenue is spent on capital expenditure, highlighting that they are also a capital light business.

✔️

Does Badger Meter have steady revenue and free cash flow (FCF) per share growth?

Over the last 5 years, BMI has grown its revenue and FCF per share by just under 15%.

Their FCF per share growth has been relatively consistent, supporting the above findings that a portion of BMI's revenues are recurring and that there's some insulation from cyclicality.

While this is good, their growth isn't as high as I would personally look for. For reference, the companies in my portfolio typically average over 25% FCF per share growth per year.

⚠️

Pricing power

What does Badger Meter buy and from whom?

BMI purchases raw materials (including brass, aluminium, stainless steel) from a limited number of specialised suppliers, which may indicate a source of risk if there were a supply chain shock given the exposure to commodity prices and a concentrated set of suppliers. BMI seeks to mitigate some of this risk through their procurement strategy and inventory management.

Companies with strong pricing power are normally not overly reliant on raw materials. Those that are, typically having strong supply chain control. It's unclear whether BMI's procurement strategy and inventory management amounts to strong supply chain control.

⚠️

Has Badger Meter been able to boost their profitability through expense margins coming down?

Over the last decade, BMI's expense margins have remained relatively stable. I personally like it when a company's expense margins come down over time. If the cost-of-goods (COGS) margin is coming down, then this suggests that the company has pricing power, as it indicates a growing markup is being charged. If the operating expenses (OpEx) margin is coming down, then this suggests that the company has operating efficiency, as the cost of operations aren't going up as revenue goes up. BMI's growth hasn't come from expense margins significantly coming down. This suggests that growth is primarily volume growth, not price growth.

⚠️

Is Badger Meter selling something that is essential and/or mission-critical to its customers?

BMI's flow measuring and water metering equipment provides its customers with the data they need to manage their water distribution, to detect leaks, to ensure accurate billing, to ensure regulatory compliance and to optimise performance. The reliance on these outcomes by their customers makes BMI's products and services mission-critical. This is an essential for me, as it is the foundation of pricing power.

✔️

Is Badger Meter selling something that is affordable for its customers?

BMI's products are generally affordable for its customers. Their subscription-based options (metering-as-a-service) helps spread costs. The combination of mission-critical and affordability indicates that if there were price increases, their customers would need to accept them, but they could also afford to as well.

✔️

Does Badger Meter have dominant market share?

Market position is an important part of pricing power, as if prices at one company get too high, then there's an alternative to shop at. If there are no alternatives (as seen in monopolies and duopolies), then customers are forced to accept price increases. Badger Meter is regarded as a leading player in the smart water metering market. They compete with Sensus (Xylem), Neptune (Roper), Diehl Metering, Itron, and others. Therefore, BMI is best described as being in an oligopoly, rather than a monopoly or duopoly.

Ultimately, my preference is to invest in monopolies or duopolies. I am willing to extend this to oligopolies if there's high and increasing market demand for their products, and if there's switching costs in place (dealt with below).

⚠️

Does Badger Meter have barriers to entry that create its market share?

The key barrier to entry for a new entrant would be the lengthy qualification and approval process required to enter the market. Once approved, the entrant would then want to lure existing customers to their new business. However, customers would not be incentivised to switch given the high switching costs once meters and software are installed.

I prefer to also see barriers to scale that are a consequence of having developed advanced technology that's hard to recreate (e.g. NVIDIA, ASML) and/or having network effects (e.g. Visa, FICO). While there is some degree of a barrier to entry for BMI, they are not at the near-insurmountable level seen in advanced tech companies.

⚠️

Capital efficiency

How much debt does Badger Meter have on its balance sheet?

Of the $816mn on BMI's balance sheet, $606mn is shareholder equity (74%).

Source: Badger Meter's 2025 10K

BMI has $112mn of goodwill (a plug variable suggesting that the company has overpaid in the past as part of their M&A strategy). Deducting this from shareholder equity gives us a value of $494mn. This represents BMI's tangible equity and indicates the amount of capital from shareholders invested in the company's physical and operating assets.

Source: Badger Meter's 2025 10K

The high equity relative to liabilities, the substantial cash holdings, the low financial leverage and high tangible equity, all indicate that BMI has a strong balance sheet.

Investors often miss that you can also infer balance sheet strength from the income statement. BMI's interest expense ($8.6mn) is very small relative to its operating profit ($157.9mn), indicating that operating earnings cover financing costs many times over. We can also compare net earnings on the income statement ($124.9mn) to long-term liabilities on the balance sheet ($91.9mn), suggesting that there's sufficient earnings to reduce debt if needed.

Source: Badger Meter's 2025 10K

In conclusion, debt is not a problem for BMI. In fact, it could be argued that there’s a case for borrowing slightly more, especially if there are future growth opportunities.

✔️

How much cash does Badger Meter generate from its capital?

Having seen that BMI primarily finances itself through shareholder equity (with a small amount of low cost debt), we can now turn to the returns BMI generates from its capital. The below chart shows the cash return on capital over the last 15 years. Since 2018, their cash ROC has typically been above 15% and is currently approximately 20%. This means they obtain a 20% return in cash from every $100 of capital they invest. While this is significantly above average, I would ideally like to see a higher figure here. For comparison, the weighted cash ROC of my portfolio is currently 40%.

⚠️

Does Badger Meter do anything that dilutes shareholder equity?

If I were to become a shareholder in BMI, I would want to know first whether they would be good stewards of my capital. I would want to avoid management that substantially dilutes shareholder interests in the company through share-based compensation (SBC). BMI uses less than 5% of their operating cash flow (OCF) as SBC. This is very low, particularly compared to some tech companies where the ratio often reaches over 30%. So SBC isn’t an issue.

✔️

To combat the shareholder dilution caused by SBC, companies often employ buybacks. The below chart shows BMI's shares outstanding over the last 15 years. For the most part, things are quite flat, suggesting that there is neither shareholder dilution (through SBC) nor shareholder concentration (through buybacks). I always avoid substantial dilution, and ideally would like to see the number of outstanding shares go down over time, but it's not the end of the world that I don't.

✔️

Valuation

Is Badger Meter currently trading at a fair valuation?

The below chart shows that over the last 5 years, FCF per share growth (approx. 15% CAGR) has been a lot lower than BMI's share price growth (approx. 28% CAGR). This suggests that BMI possibly became more expensive and highlights that it is now trading at a lower FCF yield.

The below chart shows that BMI's FCF yield has gradually dropped from 3.82% in 2019 to 2.22% today. Again, this highlights that share price growth has - in part - been driven by a market re-rating of the share price.

Theoretically, any FCF yield is justified if the forecasted future growth is high enough. Growth and value are intrinsically linked. If you believe a company is overvalued, then you implicitly believe that the market has priced in more growth than the company will actually deliver. And if you believe a company is undervalued, then you implicitly believe that the market has priced in less growth than the company will actually deliver. So the question for us is whether the market is pricing in more or less growth than the company will actually deliver.

The below chart is BMI's FCF per share over the last decade. My forecast is that in 2027 the FCF per share will be $5.2. At today's share price of $180.75, this equates to a forward FCF yield of 2.8%, which is a lot lower than other companies I follow. For example, my forward FCF yield calculation for Qualys is 5.7%.

If BMI manages to continue to deliver strong secular growth and margin stability, then their forecasted FCF per share could reach $6.2 or higher in 2027, which gives us a forward FCF yield of at least 3.4%. So while not expensive, BMI isn't exactly cheap at this price either.

BMI is currently trading at 27% below its all-time high, which possibly does provide some buffer.

⚠️

Conclusion

Am I buying Badger Meter?

The first filter a company has to pass to be investable for me is the quality growth filter. BMI is undoubtedly an above average company, but quality growth investing isn't just about picking above average companies. It is about only owning the highest quality companies, and not owning anything else. Ultimately, for BMI it comes down to "high, but not high enough". BMI's FCF per share growth is mid-teens, while my portfolio companies average 27%. BMI's growth has an R-Squared of 0.80 (suggesting some volatility), while my portfolio companies have 0.93 (suggesting a lot less volatility). BMI's cash return on capital is 20%, while my portfolio companies average 40%. So yes BMI is a quality company, but it is not yet the highest quality company available.

If BMI did manage to pass the quality filter, I would then consider its valuation. While I do own companies that I would deem more expensive than BMI, such companies are also delivering a lot more growth. For the growth that BMI is delivering, I would say their current valuation isn't justified.

In conclusion, BMI is a great, under-researched and under-reported company. I do believe it has a bright future ahead, backed by a lot of recurring revenue and switching costs. And for that reason I will continue to follow it closely, but in the short-term I can't see myself adding it to the portfolio.

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