Intrinsic value of Itron - ITRI

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$61.60

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$61.60

 
Intrinsic value

$45.05

 
Up/down potential

-27%

 
Rating

sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ITRI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 2.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  6.85
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  2,013
  2,053
  2,100
  2,154
  2,215
  2,282
  2,356
  2,436
  2,523
  2,617
  2,717
  2,824
  2,939
  3,061
  3,191
  3,328
  3,474
  3,629
  3,792
  3,965
  4,147
  4,339
  4,542
  4,755
  4,980
  5,217
  5,467
  5,730
  6,006
  6,297
  6,603
Variable operating expenses, $m
 
  1,369
  1,399
  1,434
  1,473
  1,516
  1,564
  1,615
  1,671
  1,732
  1,796
  1,820
  1,894
  1,973
  2,057
  2,145
  2,239
  2,339
  2,444
  2,555
  2,673
  2,797
  2,927
  3,065
  3,210
  3,363
  3,524
  3,693
  3,871
  4,059
  4,256
Fixed operating expenses, $m
 
  604
  619
  634
  650
  666
  683
  700
  718
  736
  754
  773
  792
  812
  832
  853
  874
  896
  919
  942
  965
  989
  1,014
  1,039
  1,065
  1,092
  1,119
  1,147
  1,176
  1,205
  1,235
Total operating expenses, $m
  1,917
  1,973
  2,018
  2,068
  2,123
  2,182
  2,247
  2,315
  2,389
  2,468
  2,550
  2,593
  2,686
  2,785
  2,889
  2,998
  3,113
  3,235
  3,363
  3,497
  3,638
  3,786
  3,941
  4,104
  4,275
  4,455
  4,643
  4,840
  5,047
  5,264
  5,491
Operating income, $m
  96
  81
  83
  86
  92
  100
  109
  121
  134
  149
  167
  231
  253
  276
  302
  330
  361
  394
  429
  468
  509
  553
  600
  651
  705
  763
  824
  889
  959
  1,033
  1,112
EBITDA, $m
  164
  152
  154
  159
  165
  173
  184
  196
  211
  227
  246
  266
  289
  314
  342
  372
  404
  439
  477
  517
  561
  607
  657
  710
  767
  828
  892
  961
  1,034
  1,112
  1,194
Interest expense (income), $m
  10
  10
  11
  12
  12
  13
  15
  16
  17
  18
  20
  22
  23
  25
  27
  29
  31
  34
  36
  39
  42
  45
  48
  51
  55
  58
  62
  66
  70
  75
  80
Earnings before tax, $m
  85
  71
  72
  75
  80
  86
  95
  105
  117
  131
  147
  210
  229
  251
  275
  301
  329
  360
  393
  429
  467
  508
  552
  600
  650
  704
  762
  823
  889
  958
  1,032
Tax expense, $m
  50
  19
  19
  20
  21
  23
  26
  28
  32
  35
  40
  57
  62
  68
  74
  81
  89
  97
  106
  116
  126
  137
  149
  162
  176
  190
  206
  222
  240
  259
  279
Net income, $m
  32
  52
  52
  55
  58
  63
  69
  77
  85
  96
  107
  153
  167
  183
  201
  220
  240
  263
  287
  313
  341
  371
  403
  438
  475
  514
  556
  601
  649
  699
  753

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  134
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,578
  1,473
  1,507
  1,546
  1,589
  1,637
  1,690
  1,748
  1,810
  1,877
  1,949
  2,026
  2,108
  2,196
  2,289
  2,388
  2,492
  2,603
  2,720
  2,844
  2,975
  3,113
  3,258
  3,411
  3,573
  3,743
  3,922
  4,110
  4,309
  4,517
  4,737
Adjusted assets (=assets-cash), $m
  1,444
  1,473
  1,507
  1,546
  1,589
  1,637
  1,690
  1,748
  1,810
  1,877
  1,949
  2,026
  2,108
  2,196
  2,289
  2,388
  2,492
  2,603
  2,720
  2,844
  2,975
  3,113
  3,258
  3,411
  3,573
  3,743
  3,922
  4,110
  4,309
  4,517
  4,737
Revenue / Adjusted assets
  1.394
  1.394
  1.393
  1.393
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
  1.394
Average production assets, $m
  270
  275
  281
  289
  297
  306
  316
  326
  338
  351
  364
  378
  394
  410
  428
  446
  466
  486
  508
  531
  556
  581
  609
  637
  667
  699
  733
  768
  805
  844
  885
Working capital, $m
  319
  203
  208
  213
  219
  226
  233
  241
  250
  259
  269
  280
  291
  303
  316
  330
  344
  359
  375
  392
  411
  430
  450
  471
  493
  517
  541
  567
  595
  623
  654
Total debt, $m
  305
  309
  331
  356
  384
  415
  449
  486
  526
  570
  616
  666
  719
  775
  835
  899
  967
  1,038
  1,114
  1,193
  1,278
  1,367
  1,460
  1,559
  1,663
  1,773
  1,889
  2,010
  2,138
  2,273
  2,414
Total liabilities, $m
  946
  950
  972
  997
  1,025
  1,056
  1,090
  1,127
  1,167
  1,211
  1,257
  1,307
  1,360
  1,416
  1,476
  1,540
  1,608
  1,679
  1,755
  1,834
  1,919
  2,008
  2,101
  2,200
  2,304
  2,414
  2,530
  2,651
  2,779
  2,914
  3,055
Total equity, $m
  632
  523
  535
  549
  564
  581
  600
  620
  643
  666
  692
  719
  748
  780
  813
  848
  885
  924
  966
  1,010
  1,056
  1,105
  1,157
  1,211
  1,268
  1,329
  1,392
  1,459
  1,530
  1,604
  1,682
Total liabilities and equity, $m
  1,578
  1,473
  1,507
  1,546
  1,589
  1,637
  1,690
  1,747
  1,810
  1,877
  1,949
  2,026
  2,108
  2,196
  2,289
  2,388
  2,493
  2,603
  2,721
  2,844
  2,975
  3,113
  3,258
  3,411
  3,572
  3,743
  3,922
  4,110
  4,309
  4,518
  4,737
Debt-to-equity ratio
  0.483
  0.590
  0.620
  0.650
  0.680
  0.710
  0.750
  0.780
  0.820
  0.850
  0.890
  0.930
  0.960
  0.990
  1.030
  1.060
  1.090
  1.120
  1.150
  1.180
  1.210
  1.240
  1.260
  1.290
  1.310
  1.330
  1.360
  1.380
  1.400
  1.420
  1.440
Adjusted equity ratio
  0.345
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355
  0.355

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  32
  52
  52
  55
  58
  63
  69
  77
  85
  96
  107
  153
  167
  183
  201
  220
  240
  263
  287
  313
  341
  371
  403
  438
  475
  514
  556
  601
  649
  699
  753
Depreciation, amort., depletion, $m
  68
  71
  72
  72
  73
  74
  75
  76
  77
  78
  79
  35
  37
  38
  40
  42
  44
  45
  47
  50
  52
  54
  57
  60
  62
  65
  68
  72
  75
  79
  83
Funds from operations, $m
  84
  123
  124
  127
  131
  137
  144
  152
  162
  173
  186
  188
  204
  222
  241
  261
  284
  308
  334
  363
  393
  425
  460
  497
  537
  580
  625
  673
  724
  778
  836
Change in working capital, $m
  -32
  4
  5
  5
  6
  7
  7
  8
  9
  9
  10
  11
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  25
  26
  27
  29
  30
Cash from operations, $m
  116
  97
  119
  121
  125
  130
  136
  144
  154
  164
  176
  178
  193
  209
  228
  248
  269
  293
  318
  345
  375
  406
  440
  476
  515
  556
  600
  647
  697
  750
  806
Maintenance CAPEX, $m
  0
  -25
  -26
  -26
  -27
  -28
  -29
  -30
  -31
  -32
  -33
  -34
  -35
  -37
  -38
  -40
  -42
  -44
  -45
  -47
  -50
  -52
  -54
  -57
  -60
  -62
  -65
  -68
  -72
  -75
  -79
New CAPEX, $m
  -44
  -5
  -6
  -7
  -8
  -9
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -37
  -39
  -41
Cash from investing activities, $m
  -48
  -30
  -32
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -46
  -48
  -50
  -53
  -55
  -58
  -62
  -65
  -67
  -70
  -74
  -78
  -81
  -86
  -90
  -94
  -98
  -103
  -109
  -114
  -120
Free cash flow, $m
  68
  66
  87
  88
  90
  93
  98
  104
  111
  120
  130
  129
  142
  156
  172
  189
  208
  229
  251
  275
  301
  329
  359
  391
  425
  462
  501
  543
  588
  635
  686
Issuance/(repayment) of debt, $m
  -63
  18
  22
  25
  28
  31
  34
  37
  40
  43
  46
  50
  53
  56
  60
  64
  67
  71
  76
  80
  84
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
Issuance/(repurchase) of shares, $m
  3
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -63
  18
  22
  25
  28
  31
  34
  37
  40
  43
  46
  50
  53
  56
  60
  64
  67
  71
  76
  80
  84
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
Total cash flow (excl. dividends), $m
  3
  84
  109
  113
  118
  124
  132
  141
  152
  163
  177
  179
  195
  213
  232
  253
  276
  300
  326
  355
  385
  418
  452
  490
  529
  572
  617
  665
  716
  770
  828
Retained Cash Flow (-), $m
  -27
  -11
  -12
  -14
  -15
  -17
  -19
  -20
  -22
  -24
  -26
  -27
  -29
  -31
  -33
  -35
  -37
  -39
  -42
  -44
  -46
  -49
  -52
  -54
  -57
  -60
  -64
  -67
  -70
  -74
  -78
Prev. year cash balance distribution, $m
 
  120
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  193
  97
  99
  103
  107
  113
  121
  129
  140
  151
  152
  166
  182
  199
  218
  238
  261
  285
  311
  339
  369
  401
  435
  472
  511
  553
  598
  645
  696
  750
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  185
  89
  86
  84
  83
  82
  82
  81
  80
  79
  72
  71
  69
  67
  64
  61
  57
  52
  48
  43
  38
  33
  29
  24
  20
  16
  13
  10
  8
  6
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Itron, Inc. provides metering solutions to electricity, gas, and water utility markets worldwide. The company operates through three segments: Electricity, Gas, and Water. It offers standard electromechanical and electronic, gas, and water and heat meters; and advanced and smart electricity, gas, and water meters and communication modules. The company also provides prepayment systems, including smart key, keypad, and smart card communication technologies; advanced systems, such as handheld, mobile, and fixed network collection technologies; smart network technologies; meter data management software; and knowledge application solutions. In addition, it offers installation and software implementation; professional services comprising consulting and analysis; and project management and post-sale maintenance support services. The company offers its standard metering systems to measure electricity, natural gas, water, or thermal energy; advanced metering systems to collect, store, and transmit meter data to handheld computers, mobile units, and fixed networks; and smart metering systems to collect and transmit meter data for supporting various applications. Itron, Inc. markets its products directly through its sales force, as well as through indirect sales force consisting of distributors, sales representatives, partners, and meter manufacturer representatives to utilities. The company was founded in 1977 and is headquartered in Liberty Lake, Washington.

FINANCIAL RATIOS  of  Itron (ITRI)

Valuation Ratios
P/E Ratio 73.8
Price to Sales 1.2
Price to Book 3.7
Price to Tangible Book
Price to Cash Flow 20.3
Price to Free Cash Flow 32.8
Growth Rates
Sales Growth Rate 6.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate -6%
Financial Strength
Quick Ratio 10
Current Ratio 0.2
LT Debt to Equity 46%
Total Debt to Equity 48.3%
Interest Coverage 10
Management Effectiveness
Return On Assets 2.2%
Ret/ On Assets - 3 Yr. Avg. 0.9%
Return On Total Capital 3.3%
Ret/ On T. Cap. - 3 Yr. Avg. 0.8%
Return On Equity 5.2%
Return On Equity - 3 Yr. Avg. 1.4%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 32.8%
Gross Margin - 3 Yr. Avg. 31.3%
EBITDA Margin 8.1%
EBITDA Margin - 3 Yr. Avg. 6.4%
Operating Margin 4.8%
Oper. Margin - 3 Yr. Avg. 2.5%
Pre-Tax Margin 4.2%
Pre-Tax Margin - 3 Yr. Avg. 1.8%
Net Profit Margin 1.6%
Net Profit Margin - 3 Yr. Avg. 0.3%
Effective Tax Rate 58.8%
Eff/ Tax Rate - 3 Yr. Avg. 32%
Payout Ratio 0%

ITRI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ITRI stock intrinsic value calculation we used $2013 million for the last fiscal year's total revenue generated by Itron. The default revenue input number comes from 2016 income statement of Itron. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ITRI stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ITRI is calculated based on our internal credit rating of Itron, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Itron.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ITRI stock the variable cost ratio is equal to 66.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $589 million in the base year in the intrinsic value calculation for ITRI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Itron.

Corporate tax rate of 27% is the nominal tax rate for Itron. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ITRI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ITRI are equal to 13.4%.

Life of production assets of 10.7 years is the average useful life of capital assets used in Itron operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ITRI is equal to 9.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $632 million for Itron - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 38.715 million for Itron is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Itron at the current share price and the inputted number of shares is $2.4 billion.


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COMPANY NEWS

▶ Itron chief financial officer steps down after three years   [Mar-30-17 08:29PM  at bizjournals.com]
▶ Itron chief financial officer steps down after three years   [08:29PM  American City Business Journals]
▶ [$$] How to Invest in Water: 5 Picks   [Mar-18-17 01:21AM  at Barrons.com]
▶ Are Hedge Funds Right to be So Bullish on Itron, Inc. (ITRI)?   [Nov-28-16 05:48PM  at Insider Monkey]
▶ Itron to Webcast Meeting with Analysts   [04:05PM  Business Wire]
▶ Itron Announces Third Quarter 2016 Earnings Call Details   [Oct-12-16 04:05PM  Business Wire]
Stock chart of ITRI Financial statements of ITRI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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