Is Badger Meter (BMI) a Buy After Q2 Earnings Disappointment?

Badger Meter (BMI) has long been a stalwart in the water management industry, but its Q2 2025 earnings report has sparked renewed debate about its valuation. While the company delivered strong top-line growth—$238 million in sales, up 10% year-over-year—the narrative is complicated by margin pressures, integration costs, and macroeconomic headwinds. For investors, the question is whether these near-term challenges overshadow the company's long-term strategic momentum.

Earnings: Growth, But at a Cost

BMI's Q2 results reflect a mixed bag. Revenue growth was driven by robust demand for its utility water products, Beacon SaaS, and SmartCover acquisition. The 11% year-over-year increase in utility water sales (6% organic) underscores the company's relevance in an era of aging infrastructure and climate-driven water management needs. Free cash flow rose 19% to $40.6 million, a testament to disciplined working capital management and earnings resilience.

However, gross margins expanded by only 170 basis points to 41.1%, masking a 40-basis-point decline in operating margins. This was due to a 17% year-over-year surge in SG&A expenses to $52.9 million, largely from SmartCover integration, amortization, and deferred compensation costs. While CEO Kenneth Bockhorst praised the company's “resilience,” the reality is that BMI's operating leverage is being strained by strategic investments.

Margin Pressures: Tariffs, Copper Prices, and Price-Cost Dynamics

BMI's margins are under pressure from external forces: tariffs on Chinese components and rising copper prices. The company has partially offset these costs through price increases and operational efficiency, but CFO Robert Wrocklage warned that “price-cost neutrality remains uncertain.” This is a critical risk for a business reliant on commodity-dependent manufacturing.

Yet BMI's ability to expand gross margins to 41.1%—despite these headwinds—demonstrates operational discipline. The 170-basis-point improvement was driven by automation and supply chain optimization, suggesting the company can mitigate some of these pressures over time. For now, however, the margin drag is real and could persist until tariffs stabilize.

Strategic Integration: SmartCover and BlueEdge

BMI's long-term story hinges on its ability to integrate SmartCover and scale its BlueEdge platform. The SmartCover acquisition, which added $10 million in sales this quarter, is still in its early stages. While management called the integration “on track,” the $9.1 million incremental SG&A cost highlights the immediate pain of inorganic growth. Investors should monitor whether synergies materialize in 2026, particularly around supply chain efficiencies and cross-selling.

Meanwhile, BlueEdge—a $150 million bet on software and analytics—continues to show promise. The platform's machine learning tools and field apps are generating customer enthusiasm, aligning BMI with the broader trend of digital transformation in utilities. This could unlock recurring revenue streams and higher margins in the future.

Long-Term Fundamentals: Still Compelling

BMI's durable competitive advantages remain intact. The company operates in a $20 billion water metering market, where demand is driven by infrastructure modernization and climate resilience. Its 30-year dividend growth streak and strong balance sheet (with $40.6 million in free cash flow) provide a margin of safety.

Moreover, BMI's sustainability initiatives—such as exceeding 2024 greenhouse gas reduction targets—position it to benefit from regulatory tailwinds. As utilities face stricter environmental regulations, BMI's integrated solutions could become increasingly indispensable.

Is It a Buy?

BMI's Q2 earnings highlight a classic tension: short-term margin pressures versus long-term strategic momentum. The stock is currently trading at a P/E of 22x, below its five-year average of 25x, suggesting undervaluation if margin expansion resumes. However, the integration costs and tariff uncertainty create near-term volatility.

For patient investors, BMI offers a compelling case. The company's disciplined approach to capital allocation, strong cash flow generation, and alignment with secular trends (digital utilities, sustainability) justify a long-term buy thesis. That said, investors should wait for clearer signs that operating margins stabilize—perhaps in early 2026—and that BlueEdge delivers tangible revenue growth.

Final Verdict:
BMI is not a “buy” on the heels of Q2 earnings alone, but it is a “hold with cautious optimism.” The company's long-term growth levers—BlueEdge, SmartCover, and infrastructure demand—are intact. Those willing to stomach near-term margin pressures for a durable, high-margin business with strong cash flow could find value here. For others, waiting for a clearer inflection point may be prudent.