ITRI - Itron: Shares Still Have Legs To Run

2023-06-13 12:03:39 ET

Summary

• Itron, Inc. is in a good position to continue delivering positive surprises with its financial performance for the remainder of 2023.
• I deem Itron's current valuations to be undemanding, after a review of its historical valuations and future earnings growth potential.
• Itron's reasonably attractive valuations and its favorable financial outlook suggests that its shares have upside potential.

Elevator Pitch

I continue to rate Itron, Inc. ( ITRI ) stock as a Buy, as I think that the stock still has legs to run. I expect ITRI's upcoming quarterly results for 2023 to beat expectations, and I think that Itron's stock is still undervalued. Therefore, I choose to keep my Buy rating for ITRI unchanged.

ITRI's Q1 2023 Performance Was A Positive Surprise

I previously initiated Itron with a Buy rating as per my earlier March 31, 2023 initiation article .

My bullish thesis for ITRI was that "Itron will surprise the market with better-than-expected earnings" for the current year, considering that it "has been overly cautious in setting its (FY 2023) guidance." I turned out to be right, as ITRI's actual Q1 2023 revenue and normalized EPS came in +6.5% and +361.1%, respectively, above market expectations.

Itron's share price jumped by +21.4% on the day of its first quarter results release, and ITRI's stock is up by +30.2% (source: Seeking Alpha price data) following the publication of my initiation article. Despite the fact that ITRI's shares have performed very well after its above-expectations Q1 2023 results, I am of the opinion that Itron's stock price has the potential to go up.

More Positive Surprises Ahead For Itron

In my view, there is a reasonably high probability of ITRI surprising analysts and investors in a positive manner for the subsequent quarters of this year.

Itron's management has remained very conservative, as the company didn't offer an update for the company's FY 2023 guidance despite delivering revenue and earnings beats. But ITRI's Q2 2023 guidance suggests that its full-year financial performance is very likely to surpass expectations significantly.

The company had previously guided for achieving sales in the $1.85-1.95 billion range for the current year. But if I sum up ITRI's annualized Q2 2023 ($517.5 million) revenue guidance and its Q1 top line of $495 million, Itron's FY 2023 revenue might be as high as $2.05 billion. As a comparison, the consensus top line estimate for Itron is lower at $2,026 million (source: S&P Capital IQ ).

Similarly, ITRI's FY 2023 bottom line guidance appears to be understated. Itron reported a normalized EPS of $0.49 for Q1 2023, and the mid-point of the company's second quarter earnings guidance is $0.30 per share. This implies that ITRI's full-year bottom line can be estimated at $1.39. In contrast, Itron's FY 2023 EPS guidance is between $0.70 and $1.10.

There are also two other key indicators which point to Itron delivering a pretty good set of financial results for the rest of the year.

One key indicator is ITRI has guided for a book-to-bill ratio of at least 1.1 to be specific, at its Q1 2023 results call . At the company's most recent quarterly earnings briefing, Itron noted that its confidence in achieving a book-to-bill ratio above 1 stems from "the pipeline of opportunities, the number of RFIs (Requests For Information) and RFQs (Requests For Quotations) that are on the street, and the add-on business" that it has observed.

The other key indicator is the expected sales downside driven by supply chain disruptions. As per its management commentary at the first quarter earnings call, ITRI revised its projection of the hit to its quarterly revenue relating to supply chain issues downwards from $100 million previously to $50-75 million now.

ITRI's Valuations Are Still Reasonably Appealing

In my end-March initiation article, I noted that Itron's "restructuring program," which is expected to deliver cost savings for the company, is scheduled to be concluded in 2025." As such, it is more relevant to value ITRI on forward fiscal 2025 numbers.

ITRI is now trading at 19.1 times consensus forward FY 2025 normalized P/E based on its last done stock price of $72.18 as of June 12, 2023. According to S&P Capital IQ's historical valuation data, Itron used to be valued by the market at forward P/E multiples in the 12-28 times range for the 5-year time period prior to the COVID-19 outbreak in 2020. Therefore, ITRI's historical mid-point P/E ratio is about 20 times, so Itron's shares aren't expensive even after taking into account its recent share price outperformance.

Also, Itron's valuations are undemanding, when one considers the company's growth outlook following the completion of its restructuring plan by 2025. The current normalized EPS CAGR for ITRI in the FY 2025-2027 period is an impressive +30.9%. This works out to be a very attractive price-to-earnings growth or PEG multiple of 0.62 times for Itron based on its forward FY 2025 P/E of 19.1 times and its +30.9% FY 2025-2027 bottom line CAGR.

Closing Thoughts

My analysis leads me to the conclusion that ITRI's shares are undervalued and the company is well-positioned to report above-expectations results in the coming quarters. I continue to remain bullish on Itron, Inc. and retain a Buy rating for the stock.

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