Perhaps some of the price erosion can be attributed to an over baked security, but you wouldn't know it from looking at its chart back in 2008. Before the market crash, the stock traded near $110 and seemed to have a force-field around it on its upward trajectory. Nothing could penetrate it, and its P/E ratio reached 33. Back in the years before 'The Great Recession', Itron was caught up in the clean energy frenzy which was a recipe for disaster if you were one of the last investors piling in to these equities.
The stock dropped from $105 to $34 almost overnight in the 4th quarter of 2008. Patient investors could have picked it up for a song and it is still reasonably valued two years later. However, there is much conjecture on which way the market is heading these days. Whether you want to add a quality company like Itron to your portfolio is a glass half empty/glass half full scenario. Let's get up close and personal with it to see what you think.
Itron CEO Malcolm Unsworth really nailed it in the Q1 2011 Conference Call when he said: "One thing that's important to understand is that you can't stop technology.". Earlier in that same report he enunciated: "Itron is the global leader in technology solutions for electric, gas and water utilities, at a time when the utility industry has begun the most significant technology upgrade cycle in it's history. The conversion to smart meters has progressed the fastest in North America, but it's spreading quickly to other parts of the world.".
The question you may be asking yourself is what exactly is a smart meter. That answer is provided courtesy of Standard & Poor's analyst Angelo Zino in their 4/28/11 report on Itron: "Smart meters initiate and respond to two-way communication with the utility to automatically collect and transmit meter data frequently to support various applications beyond monthly billings. Itron's smart metering solutions offer more features than advanced metering systems. Smart meters can send and receive detailed data, collect and store interval data, and interface with other devices.".
It's basically a broadband based computer that receives and transmits data to and from the utility company. The smart meters can be automatically updated by downloading programming information from the Internet, just like you do with cloud applications on a PC. Itron will sell a lot of these systems because just like when you walk into a Ford (F) dealership, they try to sell you an Explorer or an Edge, not a Model-T. Utilities save a lot of money using the smart meter systems. They reduce headcount and the meter reader will go the way of the milkman.
In a 12/10/2010 ValueLine report by Sigourney Romaine, we get an idea about just how large Itron's potential market is: "About half of the electric meters in North America are now 'smart', but the worldwide proportion is only around 10%, with similar numbers for gas and water. The European Union's 2020 Directive aims to reduce carbon emissions and total energy use by 20% by 2020 and also raise the contribution of renewables by 20%. That should significantly boost demand for Itron products...".
ValueLine's Sigourney Romaine continues with this theme in the 3/11/2011 analysis: "AMI (advanced metering initiative) pilot project in both Europe and North America ought to produce solid earnings growth in 2012. The five largest European countries all have 'smart grid' AMI pilot projects that have either begun installation or are schedule to start this year or next. More U.S. projects ought to join them.". She states that the market is huge for these resource saving devices.
One thing I really like about Itron as they move into the future is their new partnership with Cisco Systems (CSCO). In a 9/1/2010 joint press release from the two companies, Cisco's standards-based IP architecture to power Itron's market leading smart meter system, they announce, "...the two will deliver a definitive 21st century Internet Protocol (IP) based communications platform to the smart grid market and help advance more consistent and reliable energy across the electric distribution system and into homes and businesses.".
The press release goes on to say they: "...will collaborate on solutions that will transition smart metering technology into an open and interoperable, enterprise-class network for utilities. Specifically, the two companies will develop a standards-based, highly secure technology for full IPv6 of field area communications to support smart metering, intelligent distribution automation and interfaces to the customer premise.".
If you are not familiar with IPv6, it's the newest standard for Internet 2.0 which allows for network security, simplifies data processing by routers, and, enables more Internet addresses for the Web. In Sigourney Romaine's 6/10/2011 ValueLine report: "...in North America, Itron recently licenced Cisco's IPv6 software package to improve two-way communications in Open Way advanced metering projects, and that should lead to more AMI (advanced metering initiative) work.". Open Way is Itron's smart meter software system and solutions.
During the latest conference call, Itron's CEO gave an ambitious 5 year plan to double sales by 2015. You may think investing in this company is a sure-fire way to a big pay-off, a golden opportunity to deliver a payload, however, there are some red flags associated with Itron. I believe they are still deep in the weeds. The big sticking point with me is that they carry a lot of debt. As of 3/31/2011, current assets are $892 million while current liabilities are $714 million. I prefer a lot less debt than that. I think they'll rise above it, but it may take some time to work off some liabilities, especially if they go on an acquisition binge which CEO Unsworth alluded to in the conference call.
Another item that caught my eye is that consensus earnings estimates growth from 2011 to 2012 will be flat. Yahoo Finance posts $4.23 earnings/share for 2011 and only $4.22/share the year after. I think there is more hell to pay on the downside of the market on a macro level, and it's a storm that will sink all ships. I realize Itron has a P/E ratio of only 11, but it can go lower. That's not to say somebody's got its number, it's just that we really haven't had that 10% to 20% correction in the market that I've been looking for. Itron doesn't pay a dividend, so it's not a widow and orphan stock, but it is a good company with a bright future although it may take another year to get there.