Mueller Industries' High Returns Questioned as Cyclical Realities Loom

What happened

A recent article highlights Mueller Industries' impressive 26.1% ROE and 16.2% ROA, raising doubts about their sustainability amid a surging stock price. DeepValue analysis reveals that recent earnings strength is buoyed by non-recurring insurance gains and favorable copper spreads, with core volumes in copper tube and brass rod declining by $138.6 million in 9M-25. Gross margins at 31.5% are inflated by one-offs and tariff protections, while market sentiment has shifted towards a compounder narrative, overlooking cyclical pressures from soft construction demand and substitution risks. Underlying fundamentals show reliance on price increases and acquisitions, with housing data and unit trends supporting only flat-to-mid-single-digit growth, not the high-teens CAGR priced in. Without a rebound in volumes or sustained policy support, these high returns are unlikely to persist, aligning with the report's sell recommendation and base case value of $110.

Implication

Current valuations at ~18.7x P/E assume high-teens EPS growth that is not supported by underlying volume trends, making the stock susceptible to earnings normalization and multiple compression. The reliance on Section 232 tariffs and non-recurring gains masks the erosion in core business volumes, which could worsen if housing demand remains weak or substitution to plastics accelerates. Mueller's infrastructure thesis through Nehring must deliver mid-single-digit growth to justify its acquisition, yet order visibility is unclear, adding execution risk. Investors should monitor gross margin trends below 29% and any policy changes to copper tariffs as early warning signals for downside scenarios. Given the base case implied value of $110 and downside to $90, incremental purchases are unattractive, favoring position trimming and re-entry only below $100 for margin of safety.

Thesis delta

The article's scrutiny on high returns reinforces DeepValue's sell thesis, emphasizing that market optimism is misplaced given the cyclical and non-recurring drivers. No fundamental shift is indicated, but increased public attention could hasten a reality check on valuations, supporting the recommendation to trim positions above $140 while monitoring for volume recovery or policy shifts.