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On Sep 27, we upgraded our recommendation on Itron, Inc. (ITRI - Analyst Report), a technology provider to the energy and water industries, to Neutral. While the company may face a more challenging competitive environment in the U.S., it will benefit from its strong backlog, new contracts and cost reduction initiatives.

Why the Upgrade?

On Jul 31, Itron reported second-quarter 2013 adjusted earnings of 58 cents per share, down 50% year over year. Adjusted earnings fell short of the Zacks Consensus Estimate of 60 cents.  Revenues also fell 17% year over year to $482 million due to lower revenues from the Energy Segment, missing the Zacks Consensus Estimate of $493 million.

Itron, a Zacks Rank #3 (Hold) stock, remains committed to cost reduction initiatives. In Sep 2013, Itron announced restructuring plans that include cutting of 750 jobs, or 9% of its workforce and closure of several facilities. The company expects to generate cost savings of about $30 million a year from the move. These actions will drive Itron’s operational efficiency and boost profitability.

For the second half of this year, volume increment will be driven by Itron’s consistent focus on expansion of its gas smart payment meter project in Azerbaijan and continuation of the Italgas smart meter rollout.

In addition, Itron’s bookings in the second-quarter 2013 grew 15% from last year, the highest level in six quarters, representing a book-to-bill ratio of 1.1. During the quarter, Itron’s largest booking was $94 million related to Duquesne Light's Smart Metering project. Positive bookings growth with some good wins including Irish Water will support long-term growth.

However, Itron lowered its 2013 revenue guidance to $1.95–$2 billion from $2–$2.1 billion and earnings to $2.25–$2.55 per share from $3.00–$3.25 per share due to a lower-than-expected pace in gas meter deployment as a result of the sluggish business environment in EMEA and product mix in North America.

Additionally, the company will continue to face a more challenged competitive environment across water and gas metering markets in the U.S. Delay in contracts and expense escalation might create problems in future. Moreover, shift in product mix, lower volume will act as headwinds in the upcoming quarters.

Other Stocks to Consider

Logitech International SA (LOGI) and Planar Systems Inc. (PLNR - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy), and Cognex Corp. (CGNX - Snapshot Report) with a Zacks Rank #2 (Buy) are performing well in computer and technology sector and are worth considering.

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