2023-03-31 10:30:40 ET
Summary
- I think that Itron will surprise the market with better-than-expected earnings in FY 2023, as it has been overly cautious in setting its guidance for the current year.
- In the intermediate term, ITRI's profit margins could expand significantly, assuming it is successful with its new restructuring plan.
- I assign a Buy rating to Itron, as I expect positive surprises in the short term and mid term will help to re-rate ITRI's shares.
Elevator Pitch
I have a Buy investment rating for Itron, Inc.'s (ITRI) shares. I am expecting ITRI to deliver positive surprises relating to FY 2023 earnings and intermediate term profitability. As such, I see Itron's stock price trading higher in time to come, when the company's actual financial performance for the near term and medium term exceeds expectations.
Business Overview
In its February 2023 investor presentation , Itron describes itself as an "industrial IoT (Internet of Things) company that enables utilities and cities" to provide "critical infrastructure services." The company was first started in 1977 , and its shares have been listed on Nasdaq since November 1993 .
An Overview Of Various Solutions Offered By Itron To Its Clients
As disclosed in its FY 2022 10-K filing , Itron generates the vast majority of its sales from its home market. North America accounted for 73% of ITRI's revenue last year. The EMEA (Europe, the Middle East and Africa) and ROW (Rest of World) geographic markets accounted for the remaining 22% and 5% of the company's 2022 top line, respectively.
ITRI's Prudent Guidance Leaves Room For A 2023 Earnings Beat
In tandem with its Q4 2022 earnings release issued in late February, Itron issued the company's financial guidance for Q1 2023 and full-year 2023.
Based on the mid-point of its management guidance, ITRI expects its full-year revenue to increase by +6% to $1.9 billion in 2023, and the company sees its normalized earnings per share or EPS decreasing by -20% to $0.90 for the current year. For the first quarter of this year, Itron anticipates that its top line and bottom line will decline by -2% YoY and -10% YoY to $467.5 million and $0.10, respectively.
The company's 2023 guidance appears to be overly prudent, taking into account its key operating metrics and the potential for a meaningful improvement in supply chain issues.
As indicated in its Q4 2022 earnings presentation , Itron's total backlog and one-year backlog grew by +15% and +40% to $4.6 billion and $2.1 billion, respectively as of December 31 last year. ITRI's book to bill ratios of 1.4 times and 1.9 times for FY 2022 and Q4 2022, respectively were much higher than 1, which implies that the company is witnessing robust demand. In an earlier section of this article, I highlighted that Itron's solutions support "utilities and cities" with respect to "critical infrastructure services", so this explains why demand for ITRI's products and services are expected to be resilient even if economies in general don't do well.
ITRI's management comments at the company's Q4 2022 results briefing provide support for the view that its 2023 guidance is way too prudent. Itron acknowledged at the company's most recent quarterly earnings call that "there is upside" to its 2023 guidance assuming that "the suppliers are able to exceed our current view." As such, it is reasonable to come to the conclusion that Itron has taken a very cautious stance in outlining its expectations for 2023.
If supply chain headwinds ease to a greater extent and in a shorter period of time, ITRI is very likely going to deliver above expectations results considering the strong demand for its solutions and products. Notably, the company had revealed at its Q4 2022 results call that the shortage of semiconductor chips alone led to a quarterly sales shortfall of around $100 million. But ITRI indicated in its fourth earnings presentation that the "recovery of supply" is "progressing", implying that the supply chain environment is becoming more favorable in early 2023.
My prediction is that ITRI will achieve a stronger high single-digit percentage growth in its top line and a milder mid-teens percentage decrease in its normalized EPS for 2023.
Restructuring Plan Will Support Profitability Improvement For The Medium Term
In its Q4 2022 earnings release, Itron revealed that it will initiate "a new restructuring plan to optimize global supply chain and manufacturing operations and to reduce company overhead." It disclosed in its Q4 2022 earnings presentation that the restructuring program is scheduled to be concluded in 2025 and deliver yearly expense reductions of between $14 million and $17 million.
Itron noted in its February 2023 investor presentation that a "shift to asset-light business model" is part of the company's key areas of focus. The company's recently announced restructuring program can be viewed as one of the steps that ITRI has taken to become less capital intensive, which will in turn boost its future profitability. For example, ITRI indicated at its most recent quarterly results call that increasing its percentage of outsourced manufacturing from 45% now to more than 50% in the future is among the key targets for its new restructuring plan.
In my view, a key positive surprise and re-rating catalyst for Itron in the medium term will be higher than expected profit margins driven by the new restructuring plan.
Concluding Thoughts
As per S&P Capital IQ valuation data, the market currently values ITRI at an undemanding consensus forward FY 2025 EV/EBITDA multiple of just 5.1 times. This implies that the market doesn't believe that supply chain issues will ease significantly for ITRI in 2023, and investors don't have much faith in the profitability improvement potential of Itron in the mid term. Low expectations imply there are opportunities for positive surprises which will act as share price catalysts for Itron. This explains my Buy rating for ITRI.
For further details see:
Itron: Expecting Positive Surprises