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By The Motley Fool

While multibagger stocks generally elicit thoughts of famous brands, high-growth stocks, or revolutionary technology innovations, countless ordinary-looking companies deliver market-stomping returns.

One example is Badger Meter (BMI) and its flow measurement, water quality and control, and communication offerings. Primarily providing water meters and related technologies to water utilities and industrial companies, Badger Meter's operations don't necessarily scream “multibagger.”

However, after posting total returns of over 5,000% since the turn of the millennium, the company certainly qualifies.

Despite this incredible run, Badger Meter remains a relatively small enterprise with a market capitalization of just $4 billion. Operating in a “smart water” industry worth roughly $20 billion and paired with clear megatrends supporting the modernization of the industry, the company has ample room for further share-price appreciation.

Here's why Badger Meter is a promising buy-and-hold forever investment at today's prices.

A leader in the modernization of the water industry

With over 119 years of operating experience, Badger Meter offers flow solutions through the following two business segments:

  • Utility water: Accounting for most of the company's sales, this segment consists of water meters (mechanical and ultrasonic), radios, software, and water-quality monitoring solutions for utility customers. Whether basic mechanical water meters or a bleeding-edge advanced metering infrastructure (AMI) system where data can be collected on Badger Meter's networks and analyzed on its software, the company's offerings are essential for water utilities. Badger Meter and its two peers, Roper Technologies and Xylem, account for roughly 85% of North American sales in this utility water-meter niche.
  • Flow instrumentation: This segment is comprised of meters, valves, and sensors used to measure and control the movement of fluids in pipes and pipelines for industrial customers dealing with water, wastewater, air, steam, or gases.

Buoyed by a smart water market expected to double in value by 2029, Badger Meter's software-as-a-service (SaaS) offerings are set to become more popular with time. These modern SaaS solutions should steadily become the norm as their utility and industrial customers face increasing pressure to improve their environmental standards — not to mention the money they could save from leak detection.

Generating 85% of its sales from replacement-driven demand, the company will look to upgrade clients to its higher-end (but cost-saving over the long run) AMI systems, which are only used by one-third of customers today. Highlighting these growing AMI sales, Badger Meter has seen its SaaS revenue grow by 28% over the last five years, compared to its overall sales-growth rate of 13% over the same time.

Bolstered by the growth of this SaaS revenue as customers modernize their water meters, the company grew sales and earnings per share (EPS) by 24% and 40%, respectively. Despite this impressive growth, management explained that demand for its more tech-heavy solutions remains so high that the company's backlog entering 2024 is higher than in 2023.

The icing on the cake for investors?

This promising growth potential comes alongside industry-leading profitability.

Badger Meter's top-tier profitability should fuel continued growth

Badger Meter boasts an impressive return on invested capital (ROIC) of 19%. That makes it the leader in its niche in that crucial profitability metric.

Measuring its profitability compared to its debt and equity, this high-and-rising ROIC is an excellent sign for investors, as companies demonstrating these indicators have proven to be a market-beating proposition.

Even more importantly for investors, this robust ROIC highlights the effectiveness of Badger Meter's history of tuck-in acquisitions. Scooping up 12 businesses since 2010, management has proven exceptional at locating and integrating well-priced acquisitions to fuel innovations and find additional growth.

Thanks to these shrewd acquisitions and the company's burgeoning SaaS solutions, Badger Meter has consistently improved its net-profit margin over time.

Via this steady profitability and persistent sales growth, the company has grown its dividend for 31 consecutive years. While its dividend yield of 0.7% may seem diminutive, had you bought and held the company from its first dividend increase 31 years ago, you would now receive an 83% dividend compared to your original cost basis.

Emboldened by the power of this incredible dividend growth, the modernization megatrends working in the company's favor, and its stellar profitability, Badger Meter looks primed to continue its multibagging ways.

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