A Pair Trade In Industrials: Buy Itron, Sell Badger Meter

Investors looking for exposure to the industrial sector are presented with a pair trade idea courtesy of Canaccord Genuity. The firm is recommending investors buy Itron, Inc. (NASDAQ: ITRI) and sell Badger Meter, Inc. (NYSE: BMI).

The Analyst

Canaccord Genuity's Chip Moore upgraded Itron's stock rating from Hold to Buy with a price target boosted from $78 to $84. The analyst downgraded Badger Meter's stock rating from Hold to Sell with a price target lowered from $48 to $42.

Itron: Conditions In Place For Growth

Itron, a provider water resource management tools, completed its acquisition of Silver Spring Networks in early 2018, Moore said in a Monday upgrade note. The combination with a former major competitor puts multiple conditions in place that ensure growth ahead, he said.

Itron expects to realize $50 million in cost savings within three years from the acquisition, and the deal improves its overall competitive positioning, the analyst said. 

The addition of Silver Spring's technology and market share/backlog will accelerate Itron's business beyond metrology into smart city applications, Moore said. This should serve as a key competitive differentiator and generate mid-term earnings per share growth toward $5 per share, he said. 

Itron's stock is trading at just 10x consensus F2018 EBITDA estimates, which is a discount to recent M&A deals in the space that occurred at 12x, according to Canaccord Genuity.

The multiple fails to reflect the environment at Itron after the Silver Spring acquisition, which implies shares should move higher as the "new platform demonstrates its potential," Moore said. 

Related Link: Benzinga's Top Upgrades, Downgrades For February 27, 2018

Badger Meter: Risk Outweighs Reward

Badger Meter, a manufacturer of flow measurement and control products, showed multiple disappointing growth metrics in recent earnings reports, Moore said in the downgrade note. The company's top-line growth in fiscal 2017 was 2.2 percent, with 0.9-percent growth in municipal water, but was likely flat or down slightly without the inclusion of the D-Flow and Carolina Meter & Supply acquisitions, the analyst said. 

Badger Meter's biggest competitor Roper's Neptune showed its investors record results and share gains, Moore said.

Adding to Badger Meter's woes, recent consolidation in the industry could result in even more difficult competition in what is already considered to be an oligopolistic market, according to Cannacord. 

Badger Meter's near-term margins likely peaked close to the 40-percent level due to recent moves higher in copper costs, Moore said. While the integration of D-Flow's technologies into the next generation E-Series ultrasonic product could be favorable, any related benefits are unlikely to be seen until 2019 at the earliest, he said. 

Badger Meter's near-term margins are not expected to move higher, and this, coupled with the more difficult competitive environment, justifies a downgrade to a bearish stance, Moore said. 

Price Action

Itron was up 0.57 percent at $70.80 at the close Tuesday. Badger Meter was down 5.37 percent at $48.05.

Related Link:

The Market In 5 Minutes: LitePay-Litecoin, Comcast-Sky, Economic Data