Itron, Inc.'s (NASDAQ:ITRI) Intrinsic Value Is Potentially 49% Above Its Share Price

Simply Wall St.
03-14

Key Insights

  • The projected fair value for Itron is US$155 based on 2 Stage Free Cash Flow to Equity
  • Current share price of US$104 suggests Itron is potentially 33% undervalued
  • Our fair value estimate is 20% higher than Itron's analyst price target of US$129

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Itron, Inc. (NASDAQ:ITRI) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for Itron

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF ($, Millions) US$248.4m US$266.3m US$304.7m US$358.0m US$392.2m US$421.7m US$447.3m US$470.1m US$490.7m US$509.8m
Growth Rate Estimate Source Analyst x7 Analyst x7 Analyst x3 Analyst x1 Est @ 9.55% Est @ 7.51% Est @ 6.08% Est @ 5.08% Est @ 4.38% Est @ 3.89%
Present Value ($, Millions) Discounted @ 8.1% US$230 US$228 US$241 US$262 US$266 US$265 US$260 US$253 US$244 US$235

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.5b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 8.1%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$510m× (1 + 2.8%) ÷ (8.1%– 2.8%) = US$9.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$9.8b÷ ( 1 + 8.1%)10= US$4.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$7.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$104, the company appears quite good value at a 33% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

NasdaqGS:ITRI Discounted Cash Flow March 14th 2025

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Itron as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.1%, which is based on a levered beta of 1.230. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Itron

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings.
    Balance sheet summary for ITRI.
Weakness
  • No major weaknesses identified for ITRI.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Debt is not well covered by operating cash flow.
  • Annual earnings are forecast to grow slower than the American market.
    Is ITRI well equipped to handle threats?

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Itron, there are three important items you should consider:

  1. Risks: Take risks, for example - Itron has 1 warning sign we think you should be aware of.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ITRI's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

免責聲明:投資有風險,本文並非投資建議,以上內容不應被視為任何金融產品的購買或出售要約、建議或邀請,作者或其他用戶的任何相關討論、評論或帖子也不應被視為此類內容。本文僅供一般參考,不考慮您的個人投資目標、財務狀況或需求。TTM對信息的準確性和完整性不承擔任何責任或保證,投資者應自行研究並在投資前尋求專業建議。

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