For many years now, environmentalists have been dreaming of a
so-called "smart grid" thatwill better manage electricity
consumption. A smart-grid would help utility companies gather
energy-consumption information and use it to improve efficiency,
spending and sustentability of electricity.
Also for years, wireless communication has become commonplace,
especially since the advent of cellphones and wireless broadband.
The union of these two ideas, however, is a relatively new idea.
It's also a significant off-the-radar opportunity for
Most investors may not be familiar with the term
"smart-metering." Indeed, it's possible some utility customers may
not even realize a smart meter is monitoring their usage of
electricity and remotely communicating that information -- in real
time -- to their utility provider. The purpose is two-fold: to
properly bill for the amount of energy used and, more important, to
analyze how and when electricity is consumed so less is used in the
Though there are a handful of companies like
Sierra Wireless (Nasdaq: SWIR)
CalAmp (Nasdaq: CAMP)
Numerex (Nasdaq: NMRX)
helping to usher in this appropriately-named machine-to-machine
ESCO Technologies (
that's making smart-metering -- and the ensuing smart grid -- all
that they should be.
Right time, right place
In 2010, global sales of smart meters quietly reached $4.38
billion, thanks to the installation of a little more than 25
million meters. By 2016, the global smart metermarket is expected
to almost quadruple to $15.2 billion, with a projected 104 million
meters to be installed that year. That's roughly a 21% annualized
growth rate, making the industry one of the more promising growth
arenas for the next few years.
Those are big numbers, though ESCO Technologies is eager to
point out that this only scratches the surface. In North America
alone, there are 380 million various utility meters measuring the
consumption of everything from natural gas to electricity to water.
Globally, the meter count jumps to 2.7 billion. With less than a 2%
penetration of the global market (by anyone), there's plenty of
room for growth.
Given how ESCO has established itself as a top name in the
industry, it has the right reputation it needs to maintain its
Take its gas-metering contracts with
Pacific Gas & Electric (
Sempra Energy's (
Southern California Gas, for example. These are the two biggest
natural gas utilities in North America and, between the two, they
are expected to buy more than 10 million smart meters during the
next few years. These two deals alone underscore how esteemed ESCO
Technologies is within the utility-metering industry.
ESCO has also won big water-metering contracts in New York,
Washington D.C. and Toronto, and controls 60% of the electricity
co-op market for new meters. In addition, the company has further
entwined wireless communications with utilities management. It has
just unveiled apartnership with utility bill-payment service
provider PayGo. Any utility customer utilizing ESCO's smart meters
can now pay their bill with a smartphone, deepening themerger of
the two technologies, and therefore deepening ESCO's foothold
within the industry.
While the future certainly looks compelling for smart-meter makers,
veteran investors know all too well how forecasts and projections
can end up being nothing more than the pipedreams of a company
that's got little else going for it.
That's not ESCO, though.
In fact, ESCO Technologies has been persistent withearnings
andrevenue growth. While sales have only grown during the past
fourquarters (to $688.4 million from $396.7 million), revenue has
grown in seven of the past nine years. And, even in 2009 and 2010
when revenue slumped, the top line only fell by 0.8% and 1.8%
during those years.
Likewise, earnings grew steadily to $46.88 million in 2012 from
2004's $35.67 million, but only twice (2006 and 2010) did they fall
on a year-over-yearbasis . Better still, not once since 2004 has
ESCO Technologies booked an annual loss. All told, revenue has
grown at an average annual rate of 10% since 2007, whileEBITDA has
grown at an annual rate of 12% during the same period.
The secret to the company's consistent success is diversity.
ESCO makes more than just utility meters. The company's fluid
filtration (used primarily in the aviation market; 39% of fiscal
2012EBIT ) and radio-frequency-shielding divisions (used in medical
and other testing facilities; 14% of fiscal 2012 EBIT) are also
important additions to the entirebottom line .
That consistency -- with more of the same kind of growth in the
cards -- justifies the trailing price-to-earnings (P/E ) ratio of
24, which is still well below the industry average of almost 32.
The forward P/E ratio of 14.6 further sweetens the pot.
Risks to Consider:
While no one is in favor of wasting energy, the market hasn't
fully embraced smart meters. Though there are a few ways to
facilitate the purchase of a smart meter, in the end, the cost is
passed on to consumers, either through higher utility bills,
tariffs, or simply charging customers for the equipment. While
they're generally worth the expense no matter how it's passed
along, unhappy utility customers have the power to at least
partiallyput the brakes on the industry's growth.
Action to Take-- >
Though several companies are dancing all around the unison of
wireless communications and utility metering, ESCO Technologies is
the only one that's hitting that nail directly on the head. It's
admittedly trading at a frothy valuation (though not expensive when
compared to industry peers), so for investors who are willing to
wait a year or more, it's a price that should prove worth
The smart-metering industry is close to hitting acritical mass
and ESCO Technologies is poised to award early investors with
double-digit growth rates. Don't wait too long before you jump at
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