More on Mueller Water, Fairholme

Barron's Online has published an article about Fairholme's purchasing a major stake in Mueller Water Products. As I mentioned yesterday, Fairholme has bought Mueller's Class B shares (MWAB/NYSE). As you know I own both classes -- the Class A shares (MWA/NYSE).

I agree with the sentiments of some in the piece that Mueller may well suffer in the next few quarters. Primarily because of softness in housing. Of course, some predict "softness" in housing is a rosy scenario. In any event, how bad housing gets will play an important role in Mueller's stock performance over the next several months.

The Barron's article also quotes an analyst speculating on whether or not Fairholme would "turn up the heat" on Mueller management, since the firm has a track record of activism. I don't have an opinion on that. Besides, everything I've read about CEO Greg Hyland paints him as committed to shareholder value. So, as with virtually everything involved with value investing, we'll just have to wait and see what happens.

The article also points out that the B shares are trading at a discount to the A shares. So let me amend what I said about buying Mueller stock yesterday, based on the article and email discussions with Geoff Gannon at Gannon On Investing.

Anyone establishing a new position in Mueller should probably just buy the B shares, as long as the discount continues. That's what I would do. (And that's what I did with Comcast, where I bought the Class A Special stock -- symbol CMCSK -- because they traded at a discount.)

The reason I own both classes of Mueller is because I bought the A shares and "inherited" the B class of stock when Walter Industries (WLT/NYSE) spun them off to me.

UPDATE 4:01 pm: Geoff Gannon has an excellent consideration of the price differences between Mueller's A and B shares at Gannon On Investing.

Comments

[Amit Chokshi]

It is amazing that the B shares are at a discount to the A shares and that has persisted for so long. I only own the B shares and was contemplating shorting the A shares and buyin the B but what prevented me from doing that was I'd need a lot of leverage to really generate strong returns due to the obvious 99%+ correlation between the two shares, so it obviously was just being too much of a smart a$$ and I just went with the B shares. But still, it's amazing that these two classes have not corrected given the B shares are better than the A shares.

Do you have any estimate of downside on MWA? The glut of inventory and expected rise in inventory for this year means we could be looking at a 5+% sales drop for this year, no? I've priced in a 3% drop in revenues for 2007 ($1.875 bn sales) but expect their cost efforts to result in some GM savings (~23% GM) and hoping they'll get to about $200MM in normal EBIT (exludes non-cash faciliation rationalization, restructuring costs).

[John]

Amit: Shorting is outside my circle of competence. And I don't have a downside target -- I simply believe as the company deleverages and benefits from the infrastructure cycle it should do well over the next few years.

[biscosc]

I also own Mueller and wrote up my analysis if you are interested.

http://www.stokblogs.com/user/103/blog