The promise of billions being pumped into smart grid companies has sent some of that sector’s stocks rallying lately. But the stimulus plan could already be losing its ability to stimulate stocks — and before so much as a dime of it is spent.
Take Liberty Lake, Wash.-based Itron. President Obama is calling for 40 million smart meters to be installed inside U.S. homes to help them track real-time electricity and usage. As a key player in smart meters, Itron looks like a likely beneficiary of the expected federal largess.
As of last Friday’s close, buoyed by all the talk of smart grid stimulus spending, Itron’s stock had rallied 90 percent from its 2008 low point of $34.43. But it tumbled 7.6 percent to end at $60.31 on Monday following a downgrade from UBS, which said it was starting to look expensive.
At this point, we believe investors are well aware of the potential benefit from the federal stimulus bill, and we see few additional near-term catalysts. While ITRI may receive new [advanced metering infrastructure] awards at some point in 2009, we believe this is balanced with a risk that ‘09 guidance is revised downwards at some point due to utility capex cuts and/or AMI project delays.
UBS said it still likes the long-term outlook for Itron. But while it maintained its $70-a-share target, the firm cut its rating to neutral from buy. Itron itself recently hinted that 2009 might present some challenges, which could take some of the shine off its smart grid appeal.
Spending at the end of the year was lower than normal, Itron said, and some advanced metering infrastructure contracts had shifted to later schedules. The company also said it generated less cash in the fourth quarter than in the third, prompting it to prepay less debt than planned, although it’s still meeting the terms of its loans.
Consider, too, that Itron gets only a third of its revenue from North America, muting the impact of federal spending on overall profits. And that, last week, the company said it was issuing 2.16 million new shares to convertible-debt holders, a move that will dilute a bit the share of current investors in future profits.
Smart grid technology promises to make our energy consumption more efficient for years, but as the drop in Itron’s share price on Monday suggests, stimulus-based rallies can come and go well before the spending actually begins.