Lazard Defending Itron (ITRI)

Sanjay Shrestha, Managing Director, Senior Analyst, Alternative Energy & Industrials at Lazard Capital Markets is maintaining his "BUY" rating on Itron Inc. (NASSDAQ:ITRI) after a big drop from earnings.  The note discusses the lowered 2007 guidance reflecting lumpiness, but with a solid outlook the weakness creates excellent buying opportunity.

"Itron reported 3Q07 revenue and operating EPS of $434 million and $0.65, versus our estimates of $430 million and $0.70, and below consensus of $444.3 million and $0.77, respectively. Gross margins were 33.4% versus our expectations of 34.7%. The company also lowered its 2007 EPS guidance to $2.65-$2.75, from $2.75-$3.00 issued in August."

"The disappointing quarter and guidance mainly reflect slower than expected North American sales as utilities delay project orders while they evaluate AMI options. Also impacting the quarter and outlook were slightly higher operating costs and an increasing revenue contribution from lower-margin Actaris sales….. Book-to-bill ratio in the quarter was 1.05:1 and backlog increased to $668 million, up from $656 million sequentially. The Actaris book-to-bill ratio was slightly less than 1:1 but is expected to return to its historical 1:1 level."

Shrestha does note further risks of revenue lumpiness, customer concentration, dependence upon utilities, and regulations.  "We are lowering our FY07 and FY08 estimates to reflect the timing of AMI orders but are leaving our 2009 estimates and our $115 target unchanged. Our $115 price target reflects a 25x multiple on our 2009 EPS estimate of $4.60. This multiple is in line with its peer group. We believe that, if anything, Itron should trade at a premium to its peers given its leadership position and increasing visibility on movement of several large-scale AMI projects."

Shares of Itron have been hit hard this morning.  ITRI is trading down about 18% around $82.50 and already traded three-times average daily trading volume.  Its 52-week trading range is $46.87 to $112.92.

Jon C. Ogg
November 2, 2007