We maintain our Neutral recommendation for Itron, Inc. (ITRI) which means the stock should perform mostly in line with the broader market. The AMI (advanced metering infrastructure) and AMR (automated meter reading) markets exhibit the maximum growth potential.
Some ongoing projects with giant water and waste producers will enhance its brand reorganization and expand its hold in the market. However, competitive threats from bigger companies, exposure to the European market and long sales cycles may have adverse effects on its business.
We believe the technology-based AMI and AMR markets have huge growth prospects in the years ahead, providing Itron with ample scope for growth and expansion. AMR and AMI meters are capable of managing, measuring, collecting, analyzing and transferring large data sets using radio frequency or mobile or network technologies (both wired and wireless) or other advanced software.
The two driving forces facilitating the AMI and AMR growth are the cost reduction strategies implemented by almost all the companies to deal with the economic recession and the slow recovery from the same, and the need for efficient allocation of energy supply to meet the increasing demand.
Recently, Itron entered into a project contract with Cleveland Division of Water (Cleveland), the largest water provider in the United States. The contract enables the latter to deploy the former’s smart water metering solution in increasing the operational efficiency and providing upgraded services to its customers.
This contract is considered Itron’s largest water meter automation project in North America, and is expected to bring long-term benefits to the company. Another project of great value is the one with Severn Trent Water, a leading water and waste water provider in the U.K.
The American Recovery and Reinvestment Act of 2009 (ARRA) has been formulated by the administration to provide tax incentives, expand unemployment benefits and upgrade social welfare provisions such as education, health care and infrastructure, including the energy sector. Total value of the grant is $787 billion, of which 64% is allocated for social welfare programs and spending.
More precisely, $4.5 billion has been awarded to utilities for investment in electricity delivery and energy reliability (smart grid), $16.8 billion for energy efficiency programs and tax incentives and $6 billion for water infrastructure upgrades. This stimulation on the part of the government is expected to accelerate growth in the energy sector.
On the flipside, Itron faces tough competition from a large number of companies offering similar products, systems and services. Some of its well-known competitors include General Electric Co. (GE), Cooper Industries plc (CBE), Badger Meter Inc. (BMI), Emerson Electric Co. (EMR).
During recent years, vendor consolidation in the industry has reduced the number of firms in the business, but those in operation are stronger. Many of its competitors are larger or are owned by larger companies that have the ability to withstand fluctuations in the business cycle better.
Another concerning factor is that selling products and services to utilities has a long sales cycle that sometimes takes years to complete. These utility sales cycles are usually long and unpredictable, due to customers’ budgeting, purchasing and regulatory processes. The company’s annual or multi-year contracts utilities are subject to rescheduling and cancellation, so even long-term deals should be viewed as short-term contracts subject to periodic review.
Itron International generates a majority of its revenues from Europe. Nearly 75% of its total International revenues in the first half of 2010 came from the European region. The frequent currency fluctuations (the U.S. dollar versus euro and Great Britain pound) in the past few months have affected the company’s revenue generation. The instability of exchange rates remains and poses a near-term risk for Itron.
Itron reported an EPS of 98 cents in its second quarter of 2010, double of 49 cents in the year-ago period and above the Zacks Consensus Estimate of 73 cents per share. Total revenue of the company was $569.5 million for the quarter, up 38% from $413.7 million in the second quarter of 2009. The company believed that its broad portfolio of products and solutions were primarily responsible for achieving such a strong performance.
The Zacks Consensus Estimate for fiscal third-quarter 2010 earnings is 84 cents. For full years 2010 and 2011, the Zacks Consensus Estimates are, respectively, $3.66 per share and $4.09 per share.
Liberty Lake, Washington-based Itron Inc., along with its subsidiaries, is one of the principal technology providers to the energy and water industries worldwide. It produces electricity, gas, water and heat meters, data collection and utility software solutions along with various other associated metering products for residential, commercial and industrial (C&I) and transmission and distribution (T&D) customers. It has two reportable segments: Itron North America and Itron International.
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