The Business of Value Investing.pdf

Avoiding Common Stumbling Blocks 239

As the housing market collapsed in 2008 and the U.S. economic

recession took hold, Mueller ’ s business operations suffered as the

decline in new home construction led to a decline in the compa-

ny ’ s products. In February 2009, the company announced that it

was taking a $ 400 million impairment charge on goodwill, which

served to reduce shareholders ’ equity by 30 percent. On the day of

the announcement, shares declined by 50 percent.

Mueller ’ s case demonstrates the potential pitfalls that exces-

sive goodwill can create when the business environment turns sour.

There is $ 470 million of goodwill remaining. At the present time,

it ’ s unclear if the company will require any further impairment

charges. For what it ’ s worth, Mueller is a fi ne company with the top

one or two market shares in many of the products it supplies. But

the company ’ s capital structure illustrates the extra need for con-

servatism on behalf of investors, especially when the operating envi-

ronment turns sour.

When comparing a company ’ s value in relation to its assets, you

have to look at the company ’ s enterprise value as being the cost of the

Table 11.4 Mueller Water Products Balance Sheet

(December 31, 2007)

Assets (Millions of USD)

Current assets $ 939.3

Property, plant, and equipment, net $ 335.1

Intangible assets $ 811.9

Goodwill $ 871.1

Other assets $ 19.7

Total assets $ 2,977.1

Total liabilities $ 1,666.0

Shareholders equity $ 1,311.1

Source: SEC filings.

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