This technology company focusing on energy and water beat analysts’ estimates by a whopping $0.40 last quarter, and eight analysts have recently increased their EPS forecasts for the company.
Itron, Inc. (ITRI)
From Argus Weekly Staff Report
We are raising our rating on the shares of Itron, Inc. (ITRI) to BUY from HOLD. Itron is a technology provider serving the global energy and water industries. Itron is now organized into three segments: Device Solutions (34% of 2Q revenue), Networked Solutions (56%) and Outcomes (10%). The Device Solutions segment provides Electricity, Gas and Water meters, data management software and various other products and services to their respective utility customers. The Networked Solutions segment includes the Silver Springs Internet connectivity platforms business. The Outcomes segments builds off customers’ device network and provides them with customized, strategic solutions.
We had been looking to get the ITRI shares back on the BUY list as earnings visibility improves. That time has come.
The company’s 2Q EPS topped expectations, and management, led by a new CEO, has raised guidance. Revenue trends for Itron were mixed in 2Q. Device Solutions sales were down 3% in constant currency due to lower EMEA volumes in gas and water. Networked Solutions’ year-over-year sales growth of 21% was driven by strong North America sales. Outcomes segment sales rose 16% on continued strength in North America deployments. On the expense side, the adjusted EBITDA margin widened by 180 basis points to 11.5%. Operating margins widened in Outcomes.
Turning to our estimates, based on our expectations for improved margins and continued sales strength in Networked Solutions, we are raising our 2019 forecast to $2.95 from $2.65. Our estimate is above the midpoint of management’s guidance range and implies growth of 11% year-over-year. Looking out to 2020, the Street expects the synergies from the acquisition to kick in, along with benefits from a restructuring. We are boosting our 2020 EPS estimate to $3.50 from $3.33, implying 19% growth. Our long-term earnings growth rate estimate is 10%.
On valuation, ITRI shares are trading at 19-times our 2019 EPS estimate, just above the five-year historical average of 18. The price/sales ratio of 1.1 and the price/book multiple of 3.3 are at the high end of the five-year historical range. Compared to the peer group (Badger Meter, Mueller Water Products, Honeywell, and Roper Technologies) the shares are trading at a discount to peer averages on most metrics. We now think this discount is unwarranted, given Itron’s improved growth prospects. We think that ITRI shares are attractively valued at current prices near $67. The shares have traded in a range of $44-$69 over the past 52 weeks, and are currently at the high end of this range.
From a technical standpoint, the shares have reversed a bearish pattern of lower highs and lower lows that dated to October 2017 and are now in an uptrend. Our 12-month target price of $78 assumes a P/E multiple of 22, in line with the industry average.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, August 22, 2019