Top Picks 2018: Itron Inc. (ITRI)

01/05/2018 5:00 am EST

Focus: INDUSTRIALS

Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

I went looking for the seemingly impossible: A stock that offers high earnings-growth potential, while trading at a reasonable valuation. You’re not gonna find too many of those in this market, asserts Ari Charney, editor of Income Millionaire.

Oh yeah, and it has to be a business I can understand. I’m a utilities guy but it turns out I didn’t have to go far afield. Itron (ITRI) is the leading global supplier of standard meters and smart meters to electric, gas, and water utilities.

The $2.7 billion company was flying high this year until a third-quarter earnings miss knocked it down. Since then, the stock has staged a moderate rebound, but it still trades at a compelling valuation.

For instance, Itron’s price-to-earnings growth ratio (PEG) is 1.1, compared to 3.3 for the average stock.

A stock with a PEG ratio around 1 is generally a pretty good value. But let’s not get overly technical: Itron is reasonably priced for a company that’s poised to grow earnings 18% annually over the next three years.

Strong earnings growth is underpinned by a utilities sector that’s still in the midst of a huge long-term buildout.

U.S. power utilities have invested an average of $94 billion annually over the past five years to expand and upgrade their networks—and more is on the way.

Meanwhile, our aging water systems are projected to need nearly $400 billion of investment to bring them up to date. Gas utility infrastructure also is in the midst of a major replacement cycle.

In the future, utilities won’t need to send a guy around to read your meter. They’ll be able to do everything remotely. We’re rapidly moving toward networked systems that can communicate with each other — the so-called Internet of Things (IOT).

That makes smart meters and the networks that support them a crucial component of the utilities sector’s upgrades. Utilities are incentivized to make these improvements because they stand to earn a fair return on these investments as part of the regulatory compact. Itron will capture a large amount of spending on smart meters.

In mid-September, Itron announced it would acquire one of its main competitors, Silver Spring Networks (SSNI), in an all-cash deal for $830 million. The merger will vault the company past most of its U.S. peers in advanced metering infrastructure networks, giving it a market share of 52%.

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