Reading Itron's Meter: There's Smoke, But Is There Fire?

When Itron (ITRI) announced a large sale recently, we said “make no bones about it: automatic meter reading will be a long-term upgrade cycle, and the fact that a company with a market cap under $2 billion is one of the leaders means a great long-term opportunity for the stock, despite the hiccups they are bound to face along the way.”

Possibly less concerned about those hiccups are the private equity guys who provided some of the capital Itron needed for a recent acquisition. As we said at the time:

The best deal of all was reserved for 10 private equity investors, who were given a discount from the recent trading so as not to disrupt the market price. The $57.50 they paid (which they won’t even have to shell out until Thursday) has already yielded a 17% return.

Did the immediate success they saw on that initial investment merely whet their appetite? The stock is up today heading into a three-day weekend over which important news will be announced, and this week there has been unusually large buying of highly speculative out-of-the-money call options that expire in just over two weeks.

As we said in the other post, Itron generates plenty of cash flow, which would allow the firm to hold significantly more debt than it currently does. This could be an attractive deal for deal-hungry private equity buyers. We see that there is smoke, and we should soon know (possibly as soon as Monday) whether there is fire. We decided to join the fun, and bought a handful of those speculative call options for ourselves. We don’t, however, recommend trying this at home, as the 2-week return if we are wrong is -100%.

Disclosure: author owns call options on Itron.