Analysts of the stock portal beststocks.com have rated HOLD the shares of Itron Inc. (NGS: ITRI). Itron is a technology provider serving the global energy and water industries. We had recently upgraded the shares, as earnings growth was improving and the backlog was solid. But the onset of the coronavirus – and the disruption of the financial markets – places companies that don’t have strong balance sheets at risk. Our financial strength rating on Itron is Medium-Low, as debt is high and fixed-cost coverage relatively low. On the income statement, sales trends are negative and margins are narrowing.
The beta on ITRI is about 1.10.
The company recently reported 3Q EPS results that plummeted year-over-year but topped the consensus forecast. Non-GAAP EPS came to $0.61, down 40% from $1.04 in the year-earlier period. The consensus forecast was for non-GAAP EPS of $0.25 per share. The adjusted EBITDA margin narrowed 450 basis points to 7.4%. Itron’s backlog was relatively steady. Bookings in the quarter totaled $432 million, up from $390 million in the previous quarter.
To date there have been no order cancellations or issues with collections from customers. But during the first half, some of Itron’s customers deferred investments, and deployments have been temporarily suspended – into next year, at the least — by local and regional governments. In response, the company has announced a 2024 restructuring plan to drive additional $25 million in cost savings.
Looking ahead to the balance of the year, management has suspended its guidance due to the uncertainty associated with the pandemic. The company had expected revenue of $2.475-$2.575 billion and for non-GAAP EPS of $3.35-$3.85. The company continues to anticipate revenue and non-GAAP earnings per share to be on par with the first half of 2024, and for free cash flow to be positive.
Earnings & Growth Analysis
Itron is organized into three segments: Device Solutions (33% of 3Q revenue), Networked Solutions (57%) and Outcomes (11%). The Device Solutions segment provides Electricity, Gas and Water meters, data management software and various other products and services to utility customers. The Networked Solutions segment includes the Internet connectivity platforms for utilities and cities (Silver Springs was acquired in January 2018 for $830 million). The Outcomes segment builds off customers’ device networks and provides them with customized, strategic solutions.
Revenue trends for Itron were mixed in 3Q. Product revenues accounted for 87% of total revenue, compared to 89% in the year-earlier period. Networked Solutions’ year-over-year sales declined 14%. Device Solutions sales were down 17% (better than the 40% decline in the prior quarter), as new system endpoints declined 17% year-over-year to 7.8 million. But Outcomes segment sales reversed course and rose 5%, compared to a decline of 9% in the prior quarter. Management attributed the declines to lower customer demand due to the pandemic.
The gross margin was pressured by 500 basis points due to COVID-19-related manufacturing inefficiencies, inventory reserves and product mix.
The EBITDA/interest expense ratio in 3Q20 was less than 4-times. The 3Q EBITDA margin was a low 7.4%.
The company has never paid a cash dividend and is unlikely to initiate one in the near term.
Management & Risks
Itron’s CEO is Tom Dietrich, who became CEO in August 2019 and had served as Itron’s executive vice president and COO since October 2015. He succeeded Philip Mezey, who had been president and CEO since 2013. The CFO is Joan Hooper, who joined Itron as CFO in June 2017 from CHC Helicopter, where she was also CFO. Lynda L. Ziegler is the chair of the board.
Management’s long-term goals (pre-pandemic) include increasing its operational scale and improved efficiency, and a target EBITDA margin in the mid-teens by 2024. Additionally, Itron plans to grow its higher-margin ‘outcome-based solutions’ business.
The company is closely following the adoption of smart platforms for electricity, natural gas and water. In North America, approximately 52% of the 400 million meters are automated. Globally, only 20% of approximately 3.3 billion meters are automated. Itron has a long history in the industry, with more than 200 million smart devices deployed.
Global energy trends appear to favor the company. In Europe, the company should benefit from an EU mandate to automate more than 300 million meters by 2024. Itron’s gas business is characterized by steady growth and high margins. As shale gas production expands globally, we expect increased demand for smarter gas grids, and a growing focus on pipeline safety and system integrity. Itron plans to leverage the technology it has developed in this segment, with the goal of becoming the market share leader in North America in 2-3 years.
Investors in the ITRI shares face risks. The company’s customers — utilities — face pressure from environmental regulation, supply-demand imbalances, and the need for energy efficiency, and Itron’s meters and software help them to lower their material and labor costs. The company’s OpenWay system enables utilities to choose different communications technologies to collect meter information (via radio frequencies or over power lines, for example), thus providing an advantage over competing systems. Advanced metering infrastructure, along with new rate designs (e.g., decoupling and more frequent adjustments) will provide consumers with the information to use electricity more efficiently. It will also provide utilities with the ability to detect and correct problems on their networks, and recover operating costs more efficiently.
Itron also faces significant competition, particularly in the electricity and software industries. Additionally, Itron’s revenue is relatively concentrated, with its 10 largest customers accounting for 33% of revenue.
Itron is a technology provider serving the global energy and water industries. Since its founding in 1977, the company has provided handheld computer systems for collecting data from meters. It has also offered automatic meter reading since 1986 and electricity meters since mid-2004. Itron also offers hardware, software and services that integrate the creation, measurement, collection, management, application and forecasting of data, thereby providing a platform for utilities to share critical knowledge with other market participants, including end-users. More than 8,000 customers in more than 100 countries use the company’s technology to optimize their delivery and use of energy and water. The company employs 7,300 people.
To value the shares from a fundamental standpoint, we look at historical multiples and compare the company to its peers. Compared to the peer group (Badger Meter, Mueller Water Products, Honeywell, and Roper Technologies) the shares trade below industry averages on most metrics. We now think this discount is warranted, given Itron’s relatively weak balance sheet and unclear EPS outlook. We may look to move this company back to the BUY list as the economy recovers post-virus and customers once again start deploying meter solutions, or if the shares fall to trendline support around $65.