There isn't much that's "sexy" about the utility business, but the headline numbers often obscure the nuts and bolts that make the industry tick. For example, keeping tack of how much water or electricity a customer uses is as boring as it gets, but Badger Meter (NYSE: BMI ) and Itron (NASDAQ: ITRI ) are leaders in what will become an increasingly important aspect of environmental stewardship.
The meter reader
It wasn't too long ago that an actual human being from the local utility had to visit every house at least once a month to read the "meter." That was how electric utilities like Pepco (UNKNOWN: POM.DL ) used to do things. The company, which operates in the Northeast, has now installed over 1.1 million smart meters.
For Pepco, the first and most obvious benefit is that it no longer has to pay employees to go to every house and business in its territory to manually read a meter. However, the benefits go well beyond that. For example, when storms cause power outages, Pepco can now remotely assess where there are problems without having to send a crew. That speeds up repair times for customers and saves money.
However, the utility is also passing on the benefits to customers. For example, Pepco's Peak Energy Savings program uses smart meters to give customers rebates. Customers are notified when energy use is elevated and can get a credit on their bills for reducing their energy use. Smart meters make this possible.
The tip of the iceburg
Pepco's rebate program is just the tip of the iceberg, too. For example, California has mandated that utilities pay customers for solar power they generate on their own roof tops. Once again smart meters make this "net metering" a reality. And that's why companies like Badger Meter and Itron have such bright futures.
In fact, Itron highlights that only 50% or so of U.S. households have smart meters installed. While that means the United States remains a growth market, that compares to a global installation rate of just 12%. That's the real opportunity.
Itron offers products and services to all kinds of utilities. The company's electricity business made up 47% of revenues in 2012, gas 29%, and water 24%. As the world continues to shift toward better tracking of resource use, Itron is well positioned to go along for the ride.
Water utilities, meanwhile, accounted for about two-thirds of Badger Meter's revenues last year. The other third of Badger's business includes meters serving such industries as food and beverage, oil and gas, and pharmaceuticals. Not participating in the electricity market is a negative, but only over the near term.
The vast majority of the water on Earth isn't drinkable. So water is perhaps the world's most precious commodity, only water rich countries like the United States haven't figured that out just yet. Over the long term, remote water metering could wind up being the biggest metering market of all.
Playing the trend
Itron has faced weak year-over-year earnings comparisons for the past four quarters or so. Although quarterly results appear to be improving sequentially, it is clearly rebuilding after a weak spell. Badger Meter, meanwhile, has been posting solid year over year performances. In fact, it boasted record top and bottom line results in the third quarter. Moreover, its shares are currently yielding around 1.4%—Itron doesn't offer a dividend.
Growth and income investors would be well served getting to know Badger Meter a little better. If you're looking for a turnaround, however, Itron might be of more interest. That said, anyone who sees the value of investing in companies that will help make the world a better environmental steward should take a deep dive into both.
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