By their nature, big changes in businesses are often hard to predict and controversial when you do. If Itron (ITRI) is destined to be what it has historically been, a provider of metering hardware and networking equipment to utilities that generates mid-single-digit FCF margins, these shares are wildly overvalued.
But if the utility markets that Itron serves really are in the early stages of a major shift towards automation, real-time management, and sustainable infrastructure, Itron could have significant transformative potential over the coming years, with higher-margin communications/networking, software, and services driving substantially higher earnings and free cash flow down the line.
This is a speculative call, but I believe that transformation can happen. I’m about as cynical as they come, and I never doubt a politician or a utility commission’s capacity for hiding their heads in the sand and ignoring the need for change. But I just don’t see how we electrify/automate more buildings and factories, shift toward more renewable and distributed generation, and see EVs take over from internal combustion engines without significant investments in the electrical grid, and those investments should drive higher-margin revenue growth at Itron.
I’m looking for 7% annualized revenue growth from Itron and long-term improvements in margins such that FCF margins move into the low double-digits, driving very strong FCF growth over the next decade. Discounting those cash flows back, I believe investors can reasonably expect a double-digit annualized total return from these shares even after they’ve more than doubled off their 52-week low.
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