Itron, Inc. provides products and services for the energy and water markets worldwide. It produces standard electricity, natural gas, and water meters for residential, commercial, industrial, and transmission and distribution customers. The company also offers advanced and smart electronic, gas, and water meters, as well as communication modules.
This is a checklist I use to quickly come to a conclusion on a stock. I score a stock, each line getting a 1, 0, or -1. A stock that scored 1 on each line would be a perfect 10. Buy it!Some of these items are quite subjective. For example how would I score Cash Flow? If a company’s cash flow is much lower than it’s reported earnings, that raises a flag and I would score it a -1. If there are more insiders buying than selling, I would score it a 1. If there are no apparent catalysts in the near future I would score it a 0 but on the other hand if there is a pending secondary that will put more stock out on the market, I would score it -1.
- CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.
- ANALYSTS- read analyst reports but come to your own conclusions.
- INSIDERS- if the people that know the company the best are not buying it, why should you?
- MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers. If all three of them can agree on the verbiage, it’s passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment.
- MARKET DIRECTION- 80% of stocks follow market direction in the short term.
- SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience
- CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.
- PEG RATIO- it’s good to find a company growing faster than it’s multiple.
- VALUATION- contrary to popular opinion, it does matter what you pay for a company. Check its’ discounted cash flow value. Buy it for less than what it’s worth, a 1, less a -1, about the same 0.
- CATALYST- what’s going to change the status quo?
Trading the markets is a humbling experience. I hope this handy checklist makes it less so.
- CHART- I like the daily and weekly chart of Itron. +1
- ANALYSTS- J.P Morgan rates it Overweight and says stock is trading at 7.5 times 2012 PF EPS which is a five year trough level multiple. Their 2012 price target is $52. 13 buys, 9 holds, 3 underperforms or sells. +1
- INSIDERS- Itron brought back at the end of August, it’s long time CEO, Leroy Nosboum after a two year hiatus. I guess the CEO he replaced was not up to snuff. I do think Nosbaum was the Chairman of the Board when the former CEO was put in place. At any rate Nosbaum bought $1 million dollars worth on 10-28-11 at $37.31. +1
- MANAGEMENT DISCUSSION 10Q AND 10K- $63 million of underfunded pension liability. The rest is more or less nothing that sticks out one way or the other. 0
- MARKET DIRECTION- 80% of stocks follow market direction in the short term. Short term positive +1
- SECTOR OUTLOOK- Macro environment could weigh on utility purchasing decisions but since utilities are fairly recession resistant, smart metering solutions that could reduce their costs or shift some to users could be more easily handled by a weak macro or decline in government stimulus programs. It’s unclear to us exactly what the benefits of smart metering systems are or if they outweigh poor macro environment. CEO said their customer’s initiatives in Europe don’t depend on government subsidy. None the less I give this. -1
- CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated. Itron has strong cash flow. I give this a plus 1
- PEG RATIO- it’s good to find a company growing faster than it’s multiple. Company has forecast a decline in revenue but restructuring and share buybacks could mitigate this. I give this a 0
- VALUATION- our own DCF assuming 0 revenue growth rate is $54.83. With just a 3% revenue growth rate, 3% 10 yr treasury yield, price climbs to 78.47 I give this a plus +1
- CATALYST- Leroy Nosbaum, former CEO, returned to troubled company end of August 2011. I give this a plus 1
Total score is 6 which makes Itron a buy under $36. I think the former CEO returning and making a substantial open market purchase will provide a confidence boost to a solid company that has been tagged too much with “green alternative energy” issues. Smart meters may be more hype than real but there is no doubt that adding utility infrastructure to the emerging markets is a growth business. Itron is certain to benefit from this. Trading the markets is a humbling experience. I hope this handy checklist makes it less so.