Itron: Q3 Earnings Beat Reinforces My Bullish View (NASDAQ:ITRI)

Elevator Pitch

My rating for Itron, Inc. (NASDAQ:ITRI) stock stays as a Buy. Previously, I analyzed ITRI’s “deferred revenue and capital allocation” in my August 25, 2023 article.

I draw attention to Itron’s most recent quarterly financial performance in the current update. ITRI’s third-quarter earnings came in above expectations, which supports my opinion that the company’s prospects in the near future are expected to be good. Furthermore, Itron raised its full-year financial guidance, and the stock’s valuations remain appealing. Therefore, I leave my Buy rating for ITRI unchanged.

The Sell Side’s Expectations Of Itron’s Third Quarter Financial Results

Before Itron announced its Q3 2023 results last Thursday, November 2, the market forecasted that ITRI will witness a sequential decline in both revenue and normalized earnings per share in the third quarter.

Specifically, Wall Street expected Itron’s top line to decrease from $541.1 million in the second quarter of 2023 to $540.3 million for the most recent quarter as per S&P Capital IQ’s consensus data. Separately, the analysts projected that ITRI’s bottom line will contract by -21% QoQ from $0.65 for Q2 2023 to $0.51 in Q3 2023.

In the next section, I highlight how ITRI actually performed relative to market expectations for the third quarter of this year.

ITRI Delivered A Massive Earnings Beat For Q3 2023

Itron’s top line and bottom line for Q3 2023 beat the analysts’ expectations. The company also achieved positive revenue and normalized EPS growth on a QoQ basis, contrary to what the sell side had expected as indicated in the preceding section.

Revenue for ITRI increased by +33% YoY and +4% QoQ to $560.8 million in Q3 2023, and this turned out to be +4% higher than the market’s consensus top-line estimate.

Itron attributed the above expectations top line for the company in the recent quarter to “better supply chain conditions and strong operational execution resulting in increased shipments” at its Q3 2023 earnings call. Earlier, I noted in my late-August write-up that “Itron expects to realize significant deferred revenue in the second half of 2023 and 2024,” and this is exactly what happened in Q3. The supply chain environment has turned favorable and this allowed Itron to deliver its products to its client at a faster-than-expected pace, which translated into a higher proportion of deferred revenue recognition.

Itron’s actual Q3 2023 normalized EPS of $0.98 exceeded the sell-side’s expectations by +92%, which translated into a bottom-line expansion of +51% QoQ and +326% YoY.

At its third-quarter results briefing, ITRI revealed that “a higher value product mix and operational efficiencies” resulted in a substantial improvement in the company’s profitability. Gross profit margin for Itron expanded from 28.5% in Q3 2022 and 32.1% in Q2 2023 to 33.4% for Q3 2023. ITRI’s EBITDA margin also improved by +6.4 percentage points YoY and +3.1 percentage points QoQ to 12.2% in the third quarter of the current year. The margin expansion explained why Itron’s most recent quarterly earnings came in significantly above expectations.

The market was clearly impressed by Itron’s massive Q3 2023 earnings beat, as ITRI’s share price jumped by +13% on the day of the results release (November 2, 2023).

Positive Prospects Are Supported By Strong Backlog And Margin Expansion Potential

ITRI’s prospects are good as evidenced by the company’s fiscal 2023 financial guidance revision. The mid-point of Itron’s FY 2023 top line and normalized EPS guidance was raised by +2% and +34% to $2,165 million and $2.88, respectively after the company reported its Q3 financial results. This implies that the company’s management sees its revenue and bottom line growing by +21% and +155%, respectively for full-year FY 2023.

A robust backlog and the potential for further profitability improvement suggest that Itron’s financial performance is expected to be resilient in the near future.

Itron’s backlog increased from $4.2 billion as of September 30, 2022 to $4.3 billion at the end of the third quarter of 2023. It is worthy of note that ITRI’s current backlog is more than two times its trailing twelve months’ revenue of $2,064 million (source: S&P Capital IQ). In other words, there is a very high probability of ITRI meeting or exceeding its top-line guidance considering its significant backlog.

Also, there is still room for further expansion of ITRI’s profit margins. Itron’s Q3 2023 EBITDA margin was 12.2%, but the company’s medium-term EBITDA margin target is in the higher 14%-16% range.

At its Q3 results call, ITRI disclosed that “the things that we’re rolling into backlog now, meaning new (repriced or price indexed) bookings” will “improve margins as we roll through some of that pre-pandemic backlog.” In specific terms, Itron estimated that approximately 70% of the current $4.3 billion backlog is made up of bookings that have pricing adjusted for inflation. As such, ITRI’s operating margins are expected to expand as the company works through its backlog over time.

Closing Thoughts

The market currently values Itron at a Price/Earnings-to-Growth or PEG ratio of 0.54 times, based on its consensus forward next twelve months’ normalized P/E multiple of 22.4 times and the market’s consensus FY 2023-2027 EPS CAGR forecast of +41.7% (source: S&P Capital IQ). ITRI’s PEG multiple is below 1 times, which indicates that the stock is undervalued. Itron’s valuations haven’t completely factored in Itron’s earnings beat and positive financial prospects, so the stock is rated as a buy.