Mueller Industries, Inc. (NYSE:MLI); My Fair Value Estimate:
Updated: Jan 16
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
Mueller Industries, Inc. manufactures copper, brass, aluminum, and plastic products. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
·The P/E is <10
o I love cheap stocks, and for others that do too, this is most likely the measure of relative value they are using
·The company is also cheap using OI/EV (~.27), my preferred relative value measure
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company’s debt relative to its Market Cap is <25%
·Shares trade above the 200-day simple moving average
o This shouldn’t matter, but enough people think it does that I give it a little weight…
·The company appears to have an easy year-over-year OI comparison in the coming quarter
·Operating Profit Margins increased sequentially and year-over-year
·The company’s balance sheet seems good, and BV has grown over 200% over 5 years
The scorecard didn’t generate any cons
Those pros and—more importantly—the company’s average ROIC (~15% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $361.2mm OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly good balance sheet and 5-yr average multiple of PE x 13.7**, I think OI x 10 is a reasonable fair value, which equates to MFV of $71.04.
At a recent price of $62.33, the differential between market value and MFV is -12%, thus I think shares are undervalued.
Conclusion: I bought a base position on 1/10/23. The company’s 10-yr ROIC is on the lower end of the range for what I consider indicative of long-term durable competitive advantage(s), thus I took a slightly smaller base position than usual. If ROIC falls below the range, I will start to value the company relative to TB and MFV will decrease substantially. But, ROIC has been increasing over 5- and 1-year periods. That, combined with the substantial growth in BV allayed any hesitation.
My positioning: Long shares
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
*Post prepared using data as of 1/10/23
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.