PREPARING FOR THE MANUFACTURING RENAISSANCE

A stock pick to ride the manufacturing boom in America.

May 27/2023

An Industrial boom is underway in America

According to a recent article from the Financial Times (April 2023), more than $200bn in large scale manufacturing projects have been committed by companies since Congress passed the Chips Act and the Inflation Reduction Act last year. This could be the beginning of a new industrial boom in America. That's great news for the country.

The Financial Times trackedmore than 75 manufacturing projects worth at least $100mn eachthat have been announced since the bills became law in August. These large scale projects are for plants to make semiconductors, electric vehicles, batteries, and renewable energy components. These announcements will create around 82,000 jobs.

This manufacturing boom bodes well for a company like the one featured in this article. It's a company with a pristine balance sheet and strong free cash flows. An American company that has been around since 1917 and has a proven track record of excellent returns.

A global company whose holdings are leading manufacturers and distributors of highly technical and everyday essential products.

GLOBAL MANUFACTURER

Mueller Industries (NYSE:MLI, $76.76) is an industrial manufacturer that specializes in copper and copper alloy manufacturing. It also produces goods made from aluminum, steel and plastics. The company is headquartered in Collierville, Tennessee. The company has operations in North America, Europe, Asia and the Middle East. Its products include tubing, fittings, valves and similar items for plumbing and HVACR related piping systems, as well as rod, forgins, extrusions, and various components for OEM applications.

In the most recent quarter, the company reported $971 million in net sales and $173 million in profits. Cash flows from operations for the quarter were $112 million. Capital expenditures for the quarter were $7.5 million. Free cash flows for the period were $104 million. The balance sheet is impressive. $782 million in cash and short-term investments at the end of the quarter. Long-term debt is pretty much nil at $2.4 million. Shares outstanding are 56.4 million.

The company's products are distributed into sectors such as building construction, appliance, defence, energy, and automotive. These products can be found as critical components in applications ranging from potable water distribution to automotive drive trains to household appliances to radar defense systems, and more. Sales are categorized into the following business segments: Piping Systems, Climate Products and Industrial Metals.

Sales by segment

Piping Systems 68%

Climate Products 16%

Industrial Metals 16%

Gross Margins

2018

2019

2020

2021

2022

% of Sales by geography

Click on graph for % per region

THE U.S. APPEARS POISED FOR A MANUFACTURING BOOM.

Strong Performance

Mueller has delivered solid results in the past four years. The company has managed to remain profitable throughout all economic cycles. The balance sheet is rock solid. It boasts a current ratio of over 4. Cash flows reached $686 million in 2022. The amount paid in dividends increased from $29 million in 2021 to $55 million in 2022.

ANNUAL FINANCIAL INFORMATION

In USD$	2022	2021	2020	2019
Sales	$3,982M	$3,769M	$2,398M	$2,431M
Gross profit	$1,118M	$830M	$432M	$395M
Gross margin	28%	22%	18%	16%
Net income	$658M	$469M	$140M	$101M
Cash	$679M	$88M	$119M	$98M
Total debt	$2.0M	$1.9M	$328M	$386M
Free cash flows	$686M	$280M	$201M	$169M
Dividends	$55M	$29M	$22M	$22M
Current ratio	4.4	2.7	2.4	3.0
ROE	37%	38%	18%	16%
Return on Assets	29%	27%	9%	7%

Takeaway

Nearly a year ago, I discovered this company, and the deeper I delve into its operations, the more I am drawn to it. It is rare to stumble upon a company with such robust financials. Here are some of the things that I like about MLI:

Fortress balance sheet with $780 million in cash and $2.4 million in debt.
Very low share count. 56 million shares outstanding as most recent quarter.
Strong cash flows and low capital expenditures
Trades at a low P/E multiple
Manufacturing sector should experience a strong tailwind for the next decade or so

I am highly optimistic about the industry sector in which Mueller operates. I believe this company will experience favorable conditions for growth and success, possibly throughout the entire decade. However, there is a potential downside if the global economy faces a severe recession. Nevertheless, even in such a scenario, I anticipate that industrial manufacturing will flourish due to the ongoing trend of the United States disengaging from China and bringing manufacturing jobs back to the country.

Right now, there's a particular aspect about Mueller that's not quite sitting well with me – its stock price. While its price-to-earnings (P/E) ratio seems reasonable, a quick look at the stock chart over the past five years shows it's currently riding high at about $76 per share. This lofty valuation raises a bit of a red flag. My gut feeling tells me that if I wait and exercise some patience, I might snag a better entry point. Honestly, I'd be pretty thrilled if I could grab some shares at a price below $40 each.

MUELLER INDUSTRIES

MLI:NYSE

Remember that this is not a stock recommendation. This is just something to consider. You can access the watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.

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