Mueller Industries (NYSE: MLI)
QVI Research Report | Updated Coverage | June 2023
Mueller Industries is a 100-year-old sleeper industrial machinery small-cap in the HVAC, refrigeration, and plumbing space.
Although boosted by previously rising copper prices, Mueller’s revenue growth, profit margins, and returns on equity and capital are compelling.
Underfollowed and underbought, the market assigns a deep discount to the stock price.
Short interest as a percentage of the float has crept to double-digits.
However, Mueller’s opportunities for continued longer-term growth from infrastructure spending and housing starts, plus an attractive downside risk profile, compel QVI to maintain its current view.
Contributing Editor’s Notes: Premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets when referencing this research report. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the intraday and market close on June 12, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Mueller Industries Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Mueller Industries, Inc. (NYSE: MLI) is a dividend-paying small-cap stock in the industrials sector’s machinery, supplies, and components industry. MLI was added to the QVI Expanded Portfolio on March 17, 2022, at a dividend- and split-adjusted $57.81 a share.
Mueller Industries, Inc. manufactures and sells copper, brass, aluminum, and plastic products in the United States, the United Kingdom, Canada, South Korea, the Middle East, China, and Mexico. It operates through three segments: Piping Systems, Industrial Metals, and Climate.
The Piping Systems segment offers copper tubes, fittings, line sets, and pipe nipples; PEX plumbing and radiant systems; and plumbing-related fittings and plastic injection tooling. It also resells steel pipes, brass and plastic plumbing valves, malleable iron fittings and faucets, and plumbing specialties; and supplies water tubes. This segment sells its products to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers, and air-conditioning original equipment manufacturers (OEMs).
The Industrial Metals segment manufactures brass, bronze, and copper alloy rods; plumbing brass, valves, fittings, and gas assemblies; cold-form aluminum and copper products; machining of aluminum, steel, brass, and cast iron impacts and castings; brass and aluminum forgings; brass, aluminum, and stainless-steel valves; fluid control solutions; and gas train assembles to OEMs in the industrial, construction, HVAC, plumbing, and refrigeration markets.
The Climate segment offers valves, protection devices, and brass fittings for various OEMs in the commercial HVAC and refrigeration markets; high-pressure components and accessories for the air-conditioning and refrigeration markets; coaxial heat exchangers and twisted tubes for the HVAC, geothermal, refrigeration, swimming pool heat pump, marine, ice machine, commercial boiler, and heat reclamation markets; and insulated HVAC flexible duct systems.
Mueller Industries, Inc. was founded in 1917 and is headquartered in Collierville, Tennessee, USA.
QVI’s value proposition elevator pitch for Mueller Industries:
Notwithstanding commodity prices and construction business cycles, MLI is the relatively safe stock of a boring yet fundamentally-sound industrial staple.
Performance vs. Sector and Market
The chart below illustrates MLI’s performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Mueller Industries in March 2022.
For example, MLI outperformed its sector and the broader market with a bullet in total returns during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Mueller Industries’ investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Mueller Industries: Bullish.
MLI Total Return vs. XLI and SPY Mueller Industries Inc (MLI) Total Return: +42.55% Industrial Select Sector SPDR ETF (XLI) TR: +0.92% SPDR S&P 500 ETF Trust (SPY) Total Return: -2.75% Since March 17, 2022 (as of June 12, 2023)
MLI Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
MLI’s earnings yield traded well above the QVI targeted floor at 14.57%, as demonstrated in the below chart. In addition, at 15.88%, MLI’s free cash flow yield also far exceeded the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that MLI trades at a steep discount. QVI will further explore valuation multiples later in this report.
Mueller Industries offers a modest forward dividend yield of 1.34%, supported by a super conservative 8.68% payout ratio, thus indicating a dividend rate with plenty of room for additional annual increases.
MLI yielded 2.08% from an annual payout of $1.20 on a split- and dividend-adjusted cost basis of $57.81 per share on March 17, 2022, the date of QVI’s initial stock coverage. Thus, our yield-on-cost basis was +74 basis points (bps) above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.74% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for MLI was 10.60% or +686 bps above the 10-Year and 10.84% or +710 bps above the Treasury yield when using QVI’s February 2022 yield-on-cost basis.
QVI’s shareholder yields rating for MLI: Bullish.
MLI Shareholder Yields Mueller Industries Inc (MLI) Price: $81.79 Mueller Industries Inc (MLI) Earnings Yield: 14.57% Mueller Industries Inc (MLI) Free Cash Flow Yield: 15.88% Mueller Industries Inc (MLI) Dividend Yield: 1.34% One-Year Trailing (as of June 12, 2023)
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Mueller Industries Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Mueller Industries had positive, double-digit three-year annualized double-digit revenue growth of 17.89%, outperforming the 12.42% median growth of the industrials sector.
Farther down the income statement, Mueller Industries had a trailing three-year lower double-digit net profit margin of 11.65%, exceeding the sector's median net margin of 6.42%.
Returns on Equity and Invested Capital
Mueller Industries' management produced a trailing three-year return on equity or ROE of 41.99%, far surpassing the targeted threshold and tripling the sector's median ROE of 13.67%.
Stock buyback programs often elevate ROE. However, there is no recent history of share repurchases by the company. Thus, its high ROE genuinely reflects Mueller Industries' outstanding profitability.
At 34.46%, Mueller Industries' three-year return on invested capital, or ROIC, tripled the QVI threshold and trounced the sector's median ROIC of 6.78%, indicating that its senior executives are superior capital allocators.
In addition, Mueller Industries' ROIC was three times its weighted average cost of capital, or WACC, of an otherwise lofty 10.41%, typical of an industrial. (Source of WACC: GuruFocus).
With double-digit revenue growth, sector-beating net profit margin, and robust returns on equity and capital, Mueller Industries' management continues its stellar century-long history of 2nd-level performance in Collierville.
QVI's fundamentals rating for Mueller Industries: Bullish.
MLI Returns on Management Mueller Industries Inc (MLI) Revenue (3y Growth): 17.89% Mueller Industries Inc (MLI) Profit Margin (3y Median): 11.65% Mueller Industries Inc (MLI) ROE (3y Median): 41.99% Mueller Industries Inc (MLI) ROIC (3 yr Median): 34.46% Three-Year Trailing (as of June 12, 2023)
MLI Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Mueller Industries (MLI), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial position through direct ownership of any stock mentioned in this report. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
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David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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