Itron Q2 Earnings Confirms Our Investment Thesis - Target Price Raised, Shares Still Undervalued

Itron reported record gross margins, and smashed Wall Street consensus on earnings per share by $0.30. The stock rose 26.23% on the day, to $107, exceeding our former price target of $100. We have adjusted our target price to $129, based on accelerated margin assumptions from record Q2 results. This implies a 21% upside from the current stock price.

A mix of structural improvements in margins, coming from manufacturing improvements and recent acquisitions have accelerated the company's adjusted gross margin to a record 41.4%. The company says they are shifting to higher-margin grid software products, which boost profitability. Despite record margins, revenue declined 7%, primarily on product deployment timing.

Our model assumes companywide EBIT margins of 18.9% by 2035, expanding from the current 15.2%. This brings margins roughly in line with their best-in-class peer, Badger Meter. This assumes a moderate revenue mix shift to higher margin software business, which is already playing out given the record gross margins the company posted in Q2.

Our DCF modeled EBIT by segment. We assume Device Solutions EBIT stays stable for H2 2026, and we see modest 200bp expansion over 10 years due to modest efficiency gains. We believe the majority of lower-margin business in this segment has already been exited, thus reducing the possible upside of further margin expansion.

Networked Solutions saw revenue deceleration due to timing, but strong EBIT margin expansion to 32.2%. Notably, book to bill improved to 0.93, giving us confidence in the ability of Itron to maintain and convert their backlog into tangible revenues. With future grid buildouts, we assume continued EBIT margin expansion of roughly 380bp to 36% as higher margin software solutions gain traction.

Outcomes EBIT margin came roughly in line with our estimate, at 22%. We assume moderate EBIT margin expansion, as we believe that for this segment, EBIT margin expansion has and will be a product of how management can improve operating leverage within the segment. If the software story carries over to Outcomes more than we expect, EBIT margins could very well expand well above what we currently have modeled.

Finally, we still model 900bp of margin expansion from Resiliency Solutions, from its current level of 27% to 36% in the long-run. We do not see integration expenses from the Urbint and Locusview acquisitions scaling with revenue, thus we expect high-margin software business within this segment to approach the same EBIT as Networked Solutions. We will closely monitor the EBIT margin and revenue forecasts for Networked Solutions, as management has not given an excess of info on this segment.

Our total revenue number missed by ~2%, mainly because Networked Solutions and Outcomes solutions missed in opposite directions, largely nullifying each other. We missed Networked Solutions big; we modeled flat, 0% for the full year (1,557,321). Actual H1 is running -15.0% YoY (689,901 vs 811,666). A flat full-year number was too optimistic given Itron’s weak first half. We missed Outcomes as well, holding it at just a 1% increase for 2026, while the first half saw a 17.5% increase, with ARR accelerating. Device solutions came in only around 200bp off of our estimates, and resiliency stayed within management’s guidance, in line with our own estimates as well. Long-term revenue growth assumptions remained unchanged, and management did not offer new guidance on 2027 revenue estimates. We still expect 16% revenue growth from 2026 to 2027, and 1% revenue growth from 2025 to 2026.

Our overall investment thesis in Itron has remained unchanged, and the Q2 earnings has only served to expedite the timeline we formerly had for EBIT margins. Our former model was too conservative on device solutions EBIT margins. We expected the EBIT margins for device solutions to hold steady at 26.5%, but we clearly underestimated the ability of management to find cost efficiencies within the segment. Networked Solutions EBIT margins expanded to ~32% much quicker than we assumed previously. Our prior model had the segment's margins to 32% by 2032. The long-term EBIT target was moved up as a result. Outcomes came roughly in line with our margin estimate, at ~22%. Resiliency Solutions also stayed in line with our prior estimate.