Itron (ITRI): Navigating EPS Growth and Valuation Amid Sector Dynamics

Itron, Inc. (ITRI) has emerged as a key player in the smart infrastructure sector, leveraging its expertise in metering, software, and data analytics to capitalize on the global shift toward energy efficiency and grid modernization. With its Q1 2025 earnings reflecting robust margin expansion and a solid backlog, the company appears positioned to navigate sector dynamics favorably. However, challenges like tariff-related headwinds and uneven segment performance demand scrutiny. Here's a deep dive into ITRI's investment merit.

Recent Performance: Strong Margins and Strategic Shifts

Itron's Q1 2025 results showcased impressive momentum. GAAP diluted EPS rose to $1.42, a 26.8% jump from $1.12 in Q1 2024, while non-GAAP EPS hit $1.52, up 22.6% year-over-year. This outperformance was driven by operational efficiency, a favorable product mix (e.g., higher-margin software and outcomes services), and cost discipline. Gross margins expanded to 35.8%, a 180-basis-point improvement from 2024, underscoring the company's ability to optimize its business.

The Outcomes segment, which delivers recurring revenue through software and data analytics, grew by 14% year-over-year. This segment's success reflects Itron's strategic pivot toward subscription-based models, a trend that reduces revenue volatility and enhances predictability. Meanwhile, legacy hardware segments like Device Solutions and Networked Solutions faced headwinds, with revenue declines of 1% and 1%, respectively. These dips were attributed to project delays and shifting customer priorities, though management emphasized that water meter sales and smart grid projects remain long-term growth drivers.

Valuation: Undervalued Relative to Peers?

Itron's valuation metrics suggest it may be trading at a discount to industry peers. At a forward P/E of 20.0 (vs. a 20.8 median for its sector), ITRI appears attractively priced. Its trailing P/E of 19.7 is also below its 5-year average of 40.67, signaling a potential valuation reset. Analysts have raised FY2025 revenue estimates by 0.14% over the past three months, aligning with an 8.5% stock price rise during the same period.

The company's $4.7 billion backlog (up from $4.3 billion in Q1 2024) and record $88 million adjusted EBITDA underscore its strong execution and future revenue visibility. Free cash flow surged to $67 million in Q1, up $33 million from the prior year, a critical indicator of financial health.

Upcoming Earnings: Key Catalysts and Risks

The next earnings report, on July 31, 2025, will test ITRI's ability to sustain momentum. Analysts expect Q2 EPS of $1.33, a 9.3% rise from Q2 2024's $1.21. Management's guidance for $605–615 million in revenue and $1.30–1.40 non-GAAP EPS implies a ~12% midpoint growth rate. Key watchpoints include:
- Tariff Impact: Potential EBITDA reductions of $15 million due to tariffs remain unresolved. Management has mitigated risks through inventory buffers, but prolonged trade tensions could pressure margins.
- Segment Recovery: Networked Solutions' delayed projects and Device Solutions' softness must stabilize to avoid diluting growth.
- Software Adoption: The Outcomes segment's recurring revenue model must continue to offset hardware volatility.

Investment Considerations

Strengths:
- Strong balance sheet with $67 million in free cash flow.
- Backlog growth and recurring revenue streams provide a moat in a cyclical sector.
- Analyst consensus of “Strong Buy” (8 analysts) and a $130.11 price target.

Weaknesses:
- Revenue volatility in hardware segments due to project timing.
- Geopolitical risks tied to tariffs and supply chains.

Verdict: Hold or Buy?

Itron's $132.78 stock price (as of June 26, 2025) reflects its recent outperformance but also carries risks. The company's valuation appears reasonable given its margin resilience and backlog, while its software-driven growth story aligns with secular trends. However, investors should remain cautious about near-term macroeconomic and geopolitical headwinds.

Recommendation:
- Hold for investors already in the stock, given its valuation and near-term risks.
- Buy on dips below $125–$130, provided the company meets Q2 guidance and tariffs don't escalate.

Itron's long-term narrative remains compelling, but its success hinges on executing against its software-first strategy while navigating sector turbulence. The July earnings report will be a pivotal moment to gauge whether the company can sustain its growth trajectory.