Mueller Industries (NYSE:MLI) is a prominent global producer of copper, brass, aluminum and plastic products, operating in three different segments.
Piping Systems Segment – Under this segment the company manufactures and distributes residential and commercial pipes, tubes, valves and fittings construction markets.
Industrial Metals Segment- Under this segment the company manufactures and distributes brass rods, precision tubes and other products of industrial use to the transportation and heavy equipment end markets.
Climate Segment- Under this segment the company manufactures and distributes valves, brass fittings and flexible ducts for heating and air conditioning or refrigeration (HVAC/R) ventilation OEMs.
Among the three segments, the piping system segment contributes the most to overall revenue and profitability, followed by the climate segment and then the industrial metals segment.
FY22 revenue by segment (without cross-segment elimination)
Mueller Industries exhibits a high concentration of end-market exposure in the building and construction industry, particularly in plumbing and HVAC/R, which accounts for approximately 87% of its revenue. In addition, the company has significant exposure to the end markets of industrial production (6%) and transportation (5%).
Revenue by end markets.
Source: Investor presentation.
MLI experienced tremendous post-pandemic growth, driven by a favorable macroeconomic environment. Given its significant share of revenue from the building and construction industry, the company capitalized on increased construction activity in both residential and non-residential markets. Additionally, growth in the HVAC industry contributed significantly to the company’s impressive growth in both top and bottom lines.
The company experienced significant top-line growth, rising from $2.43 billion in 2019 to $3.98 billion in 2022. While the revenue growth is impressive, a significant portion is attributable to price increases, driven by rising costs of inputs, which the company successfully passed on to its customers. These price adjustments not only offset the impact of input cost inflation, but also led to a significant expansion of margins. MLI’s EBITDA margins doubled, rising from 9.74% in 2019 to an impressive 23.04% in 2022.
Annual net sales of the last 5 years of MLI
The combination of top-line growth and expanding margins led to an impressive nearly 500% increase in diluted EPS, rising from $0.9 per share in 2019 to $5.49 per share in 2022.
Profits may not be sustainable
While MLI has experienced rapid profit growth in recent years, there is skepticism about the sustainability of these highs in the coming years. The company benefited from favorable macroeconomic conditions, but with the changing economic landscape and indications of an impending downturn, I predict that MLI’s top line may face challenges in the near future.
Historically, the MLI has faced a significant decline at the top during economic recessions. The accompanying chart highlights the ongoing impact on the company’s earnings whenever there is a macroeconomic slowdown.
MLI historical net sales
Furthermore, MLI’s organic growth has not been encouraging. In the pre-pandemic period from 2014 to 2019, the company reported average organic top-line growth of -2.28%. This indicates that MLI’s business has matured, presenting limited avenues for growth. Faced with a challenging macroeconomic environment, I believe the company could experience either stagnant or declining top-line numbers.
Similar to the bottom line, I foresee a normalization of the company’s margins in the coming years. MLI maintained EBITDA margins in the range of 7.7% to 9.7% from 2014 to 2019 (normalized EBITDA margins). In 2022, the reported EBITDA margin was 23.04%, significantly exceeding the pre-pandemic limit. With expectations of a stabilized or deteriorating macroeconomic landscape, I believe the company could experience a deterioration in margins.
MLI is currently trading at a relatively low TTM EV/EBITDA multiple of 4.55x, which looks cheap compared to the sector average of 12.21x. However, actual EBITDA is considered volatile, making the TTM EV/EBITDA multiple potentially misleading. As described in this article, projections suggest that MLI is poised for a decline in both top line margins and EBITDA.
For modeling MLI’s normalized EBITDA, we should consider a nominal decline in the top line and a normalized EBITDA near the upper end of the pre-pandemic level EBITDA range. I believe a 5% decline in TTM top line and 10% EBITDA margins is a reasonably conservative assumption to estimate MLI.
Calculation of normalized EBITDA
Given MLI’s enterprise value of $3.77 billion, we arrive at a normalized EV/EBITDA multiple of 11.12x, which is roughly in line with the sector average of 12.21x. Therefore, I believe the stock is priced appropriately.
On the surface, MLI looks like a profitable investment with its seemingly pure and cheap valuation. The problem, however, is that the earnings on which the current valuation numbers are based are not sustainable. I believe these elevated earnings are likely to decline as macroeconomic challenges emerge. Based on normalized EBITDA figures, I conclude that MLI is appropriately priced. Therefore, I would prefer to stay away and you should be careful before buying the stock based on the low valuation alone.