Itron: All About Smart Grid Tech

We want a stock like Itron. The dominant player in smart grid; which is the smart grid transformation. When some huge, moldy company talks about how great the smart grid is like GE did Friday and IBM did on Thursday, you go take a look at Itron, because it can actually move the needle for this stock. Smart meters have been the easiest change to get regulatory help to achieve quantifiable energy savings. Smart meters remotely connect to you and read your power meter…

Itron’s the best way to play it. I was wrong on it before. I recommended it back on April 22nd of 2008 at $100. It was a green week play. I got that wrong because it’s down over 43%. We were caught up. We made a mistake. But now that the Obama Administration’s pushing for the timing on this one’s going to be just right…

…Whereas GE is a $170 billion company with its hands in just about everything, Itron is a $2 billion company that is all about smart meters. Which means the smart grid really moves the needle for this stock. Itron has a huge customer base with advanced metering infrastructure, smart meters and advanced meters reading. Slightly less smart readers that still require people to go out in the field and collect deployments to more than 8,000 utility customers in 130 different countries in around the world, companies that have some major smart wins.

…How about a $260 million contract with San Diego Gas and Elec for 2.3 million electric and gas meters running from 2009 through 2011? Itron has broad geographic exposure. 60% to 70% of its sales come from outside the U.S. that means it’s also a big beneficiary of the weak dollar. Itron trades at only 14 times 2011 earnings. I think it’s pretty reasonable given the stock’s projected growth rate of 26% from 2010 to 2011. Thomas Weisel just downgraded Itron based on the valuation, they think the stock’s run up too much. But it’s still down 11% year to date, I think it has room to run given it’s the top player in a that’s still in its early stages. When a big multi-business company like GE says positive things about a major theme like the smart grid on its conference call we step back, find a pure play Itron. Smart grid doesn’t just move the needle for Itron. It is the needle.”– CNBC’s Mad Money 10/19/2009

On Monday, Cramer talked about an emerging theme that he has noticed in the conference calls of such blue chips as General Electric (GE) and IBM (IBM). Many companies are starting to come around to the idea of smart grid technologies as a way to help use energy more efficiently. Cramer’s view on the situation is that these conference calls are informative, but there is a much better way to play the smart grid than GE or the like because they are already so involved in other businesses. If you are interested in investing in smart meters and smart grids, the pure play is Itron (ITRI).

Cramer likes Itron for a number of reasons; among them is the projected growth rate over the next two years, potentially benefiting from a push in green technology from the Obama Administration. Furthermore, this stock is a weak dollar play with the majority of sales coming from overseas. He also thinks the stock has room to run as ITRI has underperformed the S&P 500 by a significant amount year to date.

As for Ockham’s perspective, we are not quite as bullish and have the stock currently rated Fairly Valued. This company currently trades within the historical valuation ranges of price-to-cash earnings and price-to-sales. The growth in the use of smart meters and in general smart grid technology is exciting, but the company is already receiving a significant premium for expected growth. Cramer points to the fact that Itron trades at 14x expected 2011 earnings, but that assumes impressive earnings growth. The estimates Cramer uses are assuming a doubling in earnings by the close of fiscal 2011 which is only about 15 months away. We are not saying that earnings will not improve from here on, but this is a growth premium that requires conviction to buy into. For now, we are satisfied with a neutral stance on the shares unless they fall below $50.

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Comments

[Troy Jensen:]

EXCELLENT article, shows real insight into the smart plays in a sector of GreenTech that is about to blow up (in the good way!) - the Smart Grid. Cheers to Ockham Research for an insightful article. I just wanted to add a comment as it relates to analyzing Smart Grid players from my past experience in a similar technology environment at its infancy, the Internet. Sorry for the length, but I have been knee-deep in analyzing a ton of GreenTech players (and lately, very specific to the Smart Grid sector of the GreenTech industry), and I wanted to share some of what we have learned at our company, SolVentus Energy, Inc. (not a promo - a privately-held GreenTech consultancy currently being purchased by an Asian GreenTech investment firm, merging with another of their GreenTech holdings, and re-launched, so I have nothing to sell at the moment!)

Big players (the likes of IBM and GE, as the article cites) as well as savvy InfoTech players who I feel could really dictate the macro-evolution of the Smart Grid, like Oracle and the monster of them all, Google, are all jumping on the Smart Grid bandwagon. In my analysis, Google could be a force to reckon with in regards to the Smart Grid evolution - they are dedicating not only large amounts of funding, but under the radar, a lot of their Tier One talent base. That dedication of elite talent at Google to the Smart Grid and other GreenTech initiatives should not be overlooked, that talent is one of Google's most valuable assets. Google also has strong ties to the current Administration, which is certain to dictate some of the standards of the Smart Grid as it evolves. The activity of Google, Oracle, IBM and other majors is a clear indicator at the macro-level that the Smart Grid is ready for an accelerated growth stage, and there are limitless opportunities for investors, entrepreneurs and employment, as talent migrates from other technology sectors (like Interactive, InfoTech, hardware production, mobile, etc.) to fulfill the growing needs of GreenTech and the Smart Grid sector. Google is also very active in funding smaller Smart Grid players, as well as actively looking for tactical start-up acquisitions and strategic partners in its PowerMeter initiative (www.google.org/powermeter). This just serves to augment an important point made in this article - there will be many smaller strategic and tactical contributors to the development of the Smart Grid, very similar to the evolution of the Internet.

Let's look at the Smart Grid's current evolutionary stage by way of comparison to the Internet's early days and evolution, with the caveat that they are two different animals, but both trying to accomplish the same thing - lightening fast communication of massive amounts of critical data. One important point of differentiation as we make this analogy between the Smart Grid and the Internet is that the Smart Grid's data is directly tied to the efficient, coordinated distribution of United States' electricity and energy capacity, a CRUCIAL component of social, economic and national security for our nation. This will inevitably require federal, state and local government involvement, as well as involvement from the utilities and the actual energy generators - LOTS of input points that will not allow the Smart Grid to evolve quite as organically as the Internet has, and continues to. To be sure, there will be some government standards, but with so many physical touchpoints where data will need to be communicated, there is room for several communication platforms and lots of innovative technology players. Inevitably, to accelerate growth, investment and technology advancements and applications, Smart Grid communication platform standards will have to be set at several levels. As long as these standards are set with input from all the critical parties, and they are only set for macro-platforms (say, utilizing the Internet Protocol, or IP, as the standard communication platform for all data transferred above the utility level of the grid, but not dictating a single communication platform for how a particular utility collects the data from a household smart meter, as an example), this is a positive. Again, following what the Internet has done in terms of standards thus far would serve the Smart Grid sector well.

Remember partying like it was 1995, when, for example, AOL was a huge primary gateway to the web, with it's "walled garden" strategy (proprietary browser, no IMAP or POP email, and, us old-timers in digital remember, they didn't even build their pages in HTML - they built them in a programming language called Rainman), a strategy that gave them enough valuation to purchase Time Warner, but ultimately led them to the position of a historical side note in the Internet's evolution. I'll stop drifting off with the analogy and get quickly to the point - when making your Smart Grid bets, an initial important element to consider in your analysis is how that company's business model and/or intellectual property ties into the actual communication platforms and standards emerging for the Smart Grid. This is a contentious issue currently, bets are being laid along several lines, and some will be interoperable together, and some will be proprietary and left out (as AOL's Rainman was for the standard HTML web page programming protocol). Currently, there are several communication platform standards being debating, each with their merits. Here is a good, if a bit old, short article that lays out the communication platform standards and some of the players from GreenTechMedia.com:

www.greentechmedia.com.../

The environment is very similar to the 'Net in the 90's - fractious, with many players proposing and implementing the beginnings of technologies that will require some level of interoperability, or face eventual extinction as standards emerge. Today's hot Smart Grid player could be tomorrow's AOL or Netscape - if my years in technology have taught me one valuable lesson (and valuable lessons come from both fantastic successes, and spectacular failures, and I experienced both), it's this: the Silicon Valley Law of Creative Destruction will absolutely apply to GreenTech and the Smart Grid, as it evolves over its infancy period of the next 2-10 years (and then a maturation period beyond). Disruptive Technology (technology game-changers - Google, iPhone, Twitter), and Disruptive Innovation (smaller but substantial improvements on existing technologies - FireFox browser, Facebook emerging over MySpace and Friendster, Flash beating other streaming technologies, etc) are two factors to consider as you evaluate the Smart Grid investment environment. There are so many small working pieces needed as a large national Smart Grid comes to fruition, it will require many players with Disruptive or Innovative Technology IP (IP is used here as Intellectual Property, as opposed to Internet Protocol) solutions for many touchpoints. Just four general examples:

1. The Actual Smart Meter - The actual meter hardware, and what communication platform will be used to read it (radio frequency mesh networks, Wi-Fi, Wi-Max, the use of Internet Protocol throughout the stages of data collection, etc) and transmit that information to both the end-user and the utility.

2. The End-User Touchpoints - Basically, the different ways the energy consumption intelligence is communicated to the end-users. We have seen many existing, upcoming and proposed solutions for both residential and commercial energy management systems - wall-mounted touchscreen dashboards, online-accessible dashboards with remote command-and-control ability (your Smart Grid software has analyzed and suggested, based on the current kWh tier cost, the time-of-day, the afternoon weather data it's being fed in real-time - clouds moving in and falling outdoor temperature - to turn off your air-conditioner, which you remotely do on your laptop in an airport), mobile applications with the same remote ability as well as potentially mobile applications with automated command-and-control functionality (walking around your house with the latest PowerMeter application for your Google Android phone, you can turn on and off lights, appliances, etc), and I think critically, the role A.I. (Artificial Intelligence) will play to continually evaluate and improve your home's energy consumption efficiency automatically, putting many energy efficiency decisions on autopilot so we are not bogged down with yet another information stream to monitor (email, Twitter, newsfeeds, Google Wave - I don't want another thing to monitor, to be sure!) - the opportunities are endless for various data communication and energy management solutions on end-user side. I'm excited daily by what I see evolving!

3. End-User "Smart" Home Appliances and Commercial Equipment - Smart Grid data will be fed to household appliances, as well as commercial equipment, and will be able to suggest, or simply implement automatically, energy management decisions based on real-time data being fed back-and-forth, improving efficiencies and lowering costs. If you load the dishwasher up and hit start, and it suggests based on the time-of-day you will save $3.24 to wait 38 minutes to run the machine based on the off-peak tier kWh cost, studies have shown consumers will wait the 38 minutes. In the cases of other home equipment - take pool pumps - they could be automatically set to run at off-peak times, and to not run during rain and wind storms based on weather data feeds (when those pop-up pool bottom cleaners are useless) to maximize savings without the end-user having to manage it on a constant basis. There are huge obvious advantages to commercial equipment applications, although in many cases, hours-of-operation and type-of-enterprise will dictate usage, and software will be developed to factor in that information as well. Imagine the commercial opportunities with real-time energy usage and management data to bring efficiencies into place, with energy costs being a major percentage of fixed overhead for many businesses.

4. Utility-Level Data Collection, Communication and Analysis - Obviously, huge enterprise-solution opportunities here on the macro-level, but also keep in mind all the different smaller pieces needed to collect, transfer, analyze and communicate that energy usage data. Some examples: the actual smart meters utilities are starting to install; the wireless reading devices utility companies will be purchasing to read those meters; the software and data collection hardware points (will they be inside the utility meter vehicle zipping by? Will the information read be immediately beamed via 3G or 4G wireless networks back to central data collection centers? Will newer developments have smart meters hardwired to high-speed data cable, enabling a secure, encrypted IP transfer of data via installed fiber? Or how about utilization of existing power lines with power line data communication...); utility-provided end-user data communication hardware and software package options; data interconnectivity platforms to other utility companies, state grids, and a federal grid for government oversight, management and emergency command-and-control capability; data interconnectivity platforms for real-time energy marketplaces, bringing free-market forces and their inherent efficiencies to the transfer and distribution of electricity and other energy sources, resulting in lower energy costs for end-users and higher profitability for energy generators by diverting power to peak-time demand geo-locations (I believe this will really help the Clean Energy sector, with their intermittent power generation sources like solar and wind, become more profitable, become a important part of the base-load that only traditional energy generation sources can provide today, and lower the all-important levelized cost-per-kWh to levels competitive with traditional fossil fuel energy sources). As you can see, lots of niche opportunities here as well.

These are just four rather wordy examples - I could write all night, it's an obvious passion as much as my industry. In conclusion, with so many working parts critical to the evolution of the Smart Grid, it is critical to feel the pulse of the sector by way of the smaller innovators, and not to overlook them in favor of the IBM's and GE's, who don't have the strong InfoTech background and infrastructure I strongly feel is necessary in the Smart Grid sector. The slew of Smart Grid start-ups and and both their technology, their Intellectual Property (what is their point-of-differentiation, is it proprietary, does it plug-and-play well with other platforms - a tech start-up's IP goes a long way in determining its valuation and attracting funding), software solutions, hardware and the hardware's production margin trends, as well as the company's funding partners, strategic partners, equity holders and the background and track record of their management team (a nice mix is a team with strong information technology experience along with the requisite energy expertise, in my opinion). Also keep abreast of the macro-players like Google, governmental studies and policy leanings. My guess is if the current Administration moves in the next 12-24 months on setting federal Smart Grid standards for some of these communication and data touchpoints, keep a close eye on Google's activities (again, Google and the current Administration are tight, and Google has the clout, the reputation, the talent and the cash to move fast help dictate some of those standards). Just some thoughts that hopefully are helpful to readers as you evaluate GreenTech, and Smart Grid, investment opportunities.

Postscript on Itron: I love the Itron play as well. They have fantastic traction in the strategic first-to-market (FTM) play, and that has always been an important deciding factor in all things technology. They also are bringing on important synergistic partners, and impressively, are a Google PowerMeter official strategic partner.

Disclosure: No holdings in any of the companies referenced in the comment.

Oct 22 03:03 AM