Emerging technology Carter B Shoop :- ESE(Hold to Buy, tgt $33 to $35), ITRI (Maintain Buy, tgt $87 to $70) ESCO announced that it has entered into final contract negotiations with the 6mln point utility SoCal Gas for its AMI gas network. Following customary negotiations, we expect ESCO to formally announce the final contract in 1-2 months (we see little risk of negotiations breaking down). We estimate this contract will be worth $55-65mln in sales and $0.35-0.45 in EPS per year for ESCO starting in 2012. This is a setback to Itron, who clawed its way back into contention for this contract over the past 6 months and had been viewed as the front runner.
Itron: lowering PT as medium term outlook appears increasingly challenging We believe the loss at SoCal Gas this week, and CMP and PECO the prior two weeks, raise questions about Itron’s 1) ability to close the ‘big deal’, 2) technology offering and 3) 2012 outlook. While we see more upside vs downside risk to nearterm estimates (SoCal Gas wasn’t supposed to ramp until 2012; Itron can still capture $5mln/yr in meter related sales from SoCal Gas), we are increasingly concerned about the company’s medium term outlook as its 3 large contracts wind down in 2H11/1H12. Given this uncertain near-term outlook, investors’ growing concern about Itron’s execution, and lack of near-term catalysts (30% chance of winning BGE, if the utility gets approval), we believe it is prudent to lower our price target at this time. Our new $70 PT (Previously $87) assumes that Itron trades at 17x our CY11E EPS est (vs 21x previously). We believe this lower multiple is justified given the deteriorating macro-economic trends and the fact that the company's single most important near-term catalyst has passed. Downside risks include lower than expected profitability for AMI ramps, delays in Europe’s AMI roll-out and potential IPOs by competitors.