Itron To Grow On Silver Spring Acquisition Amid Rising Costs

On Mar 7, we issued an updated research report on Itron, Inc. (NASDAQ:ITRI) . The company is poised to benefit from the Silver Spring acquisition, backlog strength, expansion of the OpenWay Riva technology and focus on restructuring plan. However, elevated expenses due to restructuring are expected to affect results.

Let’s illustrate these growth factors in detail.

Silver Spring Acquisition to Boost Results

Itron’s acquisition of Silver Spring Networks will strengthen the former’s ability to deliver a broader set of solutions, accelerate pace of growth and innovation in the smart city and industrial IoT markets. The integration of Silver Spring is progressing well and Itron has confirmed $50 million of run-rate cost synergies by the end of 2020. It also anticipates achieving $20 million on a run-rate basis by the end of this year, which will drive approximately $10 million of realized operating expense savings in 2018. These savings will ramp up in the second half of the year.

Backlog Strength a Boon for Itron

Itron witnessed a steady backlog growth in 2017 driven by a number of new customer contracts. The company secured several notable contracts in fourth-quarter 2017. Notably, Itron expanded its project with Duke Energy (NYSE:DUK) to install an additional 3 million smart meters. It also signed a four-year distributed energy management contract extension with Pepco Holdings to manage its demand-response program. In addition, Itron booked a five-year contract with NV Energy to implement Itron IntelliSOURCE.

Itron’s contracts with Consumers Energy, Cascade Natural Gas Corporation and Questar Gas in North America as well as new business at Sanepar in Brazil, and with SUEZ and Veolia in France will also provide support to the company’s backlog. Thus, the rising backlog will drive its organic revenue growth.

Itron to Gain From OpenWay Riva

Over the past five years, Itron’s total backlog has increased 13% on a compounded annual basis and 12-month backlog has risen 15%. These growth trends reflect strong industry demand for new technologies, and an expanding group of OpenWay Riva adopters across electricity, gas and water utilities. The company has been awarded $325-million contracts which are not yet reflected in the backlog. Including the $325 million of business, it has $5-million OpenWay Riva endpoints committed by customers, including Avista, Vectren, National Grid (LON:NG), Public Service of New Mexico and others. Additionally, AVANGRID and Eletrobras are installing OpenWay Riva.

Focus on Restructuring to Drive Performance

This February, Itron’s board of directors approved a new restructuring plan to optimize its global supply chain in manufacturing operations, product development, and sales and marketing organizations. This plan will result in an estimated annualized savings in the range of $45-$50 million after completion, which is expected by the end of 2020. The restructuring plan also supports the company's goals to drive profitability beyond near-term mid-teens EBITDA target.

Elevated Expenses to Mar Profit

In 2018, Itron anticipates to witness pre-tax restructuring charges in the range of $100-$110 million for the new restructuring plan, primarily for severance and other one-time termination benefits. The company expects to record majority of this charge in the first quarter. Of the total estimated charge, approximately 95% will result in cash expenditures.

Further, Itron will incur approximately $60 million of one-time severance, professional fee and facility cost to achieve synergies from the Silver Spring acquisition. Most of these costs will be accrued in the first half of this year.

Share Price Performance

Itron has underperformed its industry with respect to price performance in a year’s time. The stock has gained around 25%, while the industry has recorded growth of 37% during the same time frame.

Zacks Rank & Stocks to Consider

Itron currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector are Teradyne, Inc. (NYSE:TER) , AMETEK, Inc. (NYSE:AME) and Fortive Corporation (NYSE:FTV) . While Teradyne sports a Zacks Rank #1 (Strong Buy), AMETEK and Fortive carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Teradyne has a long-term earnings growth rate of 12%. Its shares have gained 34%, over the past six months.

AMETEK has a long-term earnings growth rate of 11.5%. The company’s shares have rallied 18.8% during the same time frame.

Fortive has a long-term earnings growth rate of 9.7%. The stock has gained 15.5% in six months’ time.

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