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Itron: The Microsoft of Metering

Expectations are high for this maker of gear for measuring energy usage, and demand for its products is greater than ever.



As you stare at your computer screen, with the dryer humming and dinner cooking, consider the crucial role of electrical power. The planet's thirst for it appears unquenchable. In the U.S., demand for electricity is growing three times faster than power resources are being added.

Enter Itron, which makes high-tech smart meters, software and communications gear for measuring energy usage in real time. One analyst calls Itron, a member of the Kiplinger Green 25, the "Microsoft of metering."

You may have already seen Itron's products at work. If you've ever noticed a meter reader in your neighborhood wielding a handheld device, chances are the Liberty Lake, Wash., company made it. Itron, which sells to more than 3,000 utilities in the U.S. alone, owns 60% of the domestic market for meters and related devices.

John Quealy, the analyst who likens Itron to Microsoft, says that because of increasing concerns about global warming, efforts toward capping emissions and the world's huge appetite for energy, the need for Itron's products is greater than ever. "You cannot fix what you cannot measure," says Quealy, who is with Canaccord Capital, an investment firm based in Vancouver, British Columbia. "New technology needs to supplant the electric power grid. That evolution starts with a smart 21st century electric meter."

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Itron makes traditional and digital meters for electricity, water and gas. Its Automatic Meter Reading systems transmit data from meters to the utility supplying the service. Newer versions of the system allow utilities to charge customers based on actual usage rather than on estimated usage.

Itron's next-generation Advanced Metering Infrastructure (AMI) technology gives utilities remote access to meters, allowing providers to control usage during peak hours. The new system will also provide customers with more-detailed data on usage. "It will allow people to see real-time pricing in their bills, such as time of use, time of year, time of day," says Quealy. "It gives us control, so that we can make informed decisions to use power efficiently and effectively."

The prospects are bright for smart-metering systems. The Energy Policy Act of 2005 mandates that all electric utilities consider implementing advanced metering systems to increase efficiency. In December, Itron won a $480 million contract from Southern California Edison for new meters and related equipment. In the past two months, Itron inked at least another nine deals with companies in the U.S., Asia and Australia.

Expanding overseas is a key part of Itron's growth strategy. Last year, it purchased a rival, Actaris Metering Systems, of Luxembourg, for $1.6 billion. With the addition of Actaris, which does business in more than 30 countries, Itron now has a 17% share of the global electric metering business.

The acquisition boosted Itron's fourth-quarter results. Sales more than doubled, to $402 million, from the same period a year ago. Fourth quarter earnings, at 81 cents a share, were well ahead of analysts' average estimates of 73 cents a share.

The fine results came as a relief to Itron shareholders, who had seen the stock (symbol ITRI) tumble 21%, to $80, on November 2 after the company reported third-quarter numbers that failed to meet analysts' expectations.

The shares, which traded at $81 when we recommended them in 25 Ways to Invest in a Cleaner World, closed April 1 at $92.83. Selling at 28 times estimated 2008 earnings of $3.36 per share, the stock may seem pricey. But earnings are expected to rise 21% this year, and analysts see a 32% leap in 2009, to $4.42 a share.

If the company makes those numbers, today's price-earnings ratio is defensible. Adds analyst Quealy: "With utility companies' balance sheets robust and capital expenditure plans intact in this soft economy, you would expect a better than average P/E ratio, given the amount of business coming down the pipeline."

Itron could stumble if its pilot AMI projects run into technical problems or don't produce the benefits that utilities expect. Analyst Paul Coster of JP Morgan Chase has warned, moreover, that growth could slow if the commissions that oversee utility companies refuse to approve higher rates to cover the costs of the new metering systems.

But given the universal need for more-efficient energy usage, it's more than likely that Itron can measure up to expectations.




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