Bear of the Day: Itron (ITRI) – Bear of the Day

Earnings estimates have been plunging for Itron (ITRI) after the company provided weak guidance for 2014.

It is a Zacks Rank #5 (Strong Sell) stock.

While shares of Itron have sold off following the announcement, it still does not look like a value at 20x forward earnings. Investors should consider avoiding this stock until its earnings momentum improves.

Itron provides solutions that measure, manage and analyze energy and water. It offers standard meters and next-generation advanced and smart metering products, systems, and services, for applications in the residential and commercial industrial markets for water and heat.

Fourth Quarter Results

Itron reported its fourth quarter results on February 12. Adjusted EPS fell 38% year-over-year to $0.36, missing the Zacks Consensus Estimate of $0.76. The company’s bottom line was significantly impacted by increased tax expenses.

The rest of the financial results weren’t as bad. Revenues were essentially flat, inching up slightly to $523.5 million, which was actually ahead of the consensus of $520.0 million. And adjusted operating income increased 26% year-over-year.

However, free cash flow plunged 54% from the same quarter last year to $24.1 million.

Estimates Plunge

In the Q4 press release, management provided disappointing guidance for 2014. The company stated that it expects adjusted EPS of $1.30-$1.80, which was significantly below consensus at the time.

This prompted analysts to revise their estimates dramatically lower for both 2014 and 2015, sending the stock to a Zacks Rank #5 (Strong Sell).

The 2014 Zacks Consensus Estimate is now $1.64, down from $2.95 just 30 days ago. The 2015 consensus is currently $2.31, down from $3.65 over the same period.

Valuation

Shares of Itron have fallen more than -10% since its Q4 press release. But it still does not look like a value here. The stock trades at 20x 12-month forward earnings, which is above its 10-year median of 17.6x. And its price to free cash flow ratio of 30 is also above its historical multiple of 20.1x.

The Bottom Line

Given its valuation and declining earnings estimates, investors should consider avoiding Itron until its earnings momentum improves.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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