Mueller Looks Hard-Pressed To Reward The Market's Rediscovered Optimism

One of the ongoing mysteries of the market that I have yet to solve is the almost evergreen enthusiasm that investors have for water-related companies. While stocks like Mueller Water Products (NYSE:MWA) and Xylem (NYSE:XYL) do have their periods of relative underperformance, it seems like there's a strong "will to believe" behind this sector that doesn't seem related to the actual underlying long-term free cash flow growth or ROIC prospects.

Be that as it may, I'm not going to look a gift horse in the mouth - I thought Mueller looked undervalued earlier this year and the 50% move in the stock since then is definitely more than I'd expected. It's also more than I think is merited by the fundamentals. I understand that housing activity and municipal spending are both looking better, and this company has been doing well with margins in its core business, but even my expectations for almost a decade of sustained double-digit FCF margins (something the company hasn't achieved before) and solid mid-single-digit revenue growth isn't enough to generate a fair value above today's stock price.

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Mueller Looks Hard-Pressed To Reward The Market's Rediscovered Optimism