This article is part of our Rising Star Portfolios Series.

I like investing in companies that solve complex problems. And I'm even fonder of companies that open up new markets by solving problems you didn't know you had. That's why I'm adding ESCO Technologies (NYSE: ESE) to My Watchlist.

Solving problems
Utilities spent decades perfecting power delivery from plants into homes, but they're not great at accessing real-time usage data. The resulting inefficient pricing and high maintenance costs were once simply a cost of doing business. But now, technology exists to vastly improve data collection -- and lower costs in the process.

ESCO's systems enable two-way transmission of data over power lines and radio and wireless networks, allowing utilities to implement demand-response programs, more quickly adjust individual accounts, and quickly pinpoint sudden power outages. ESCO's systems also save utilities money by reducing service calls and improving billing, pricing, and customer service.

Roughly 60% of ESCO's $655 million in sales come from the company's Utility segment. The other 40% of ESCO is split between a filtration business for aerospace and industrial markets, and a radio-frequency test and shielding business. While these latter two aren't the company's main growth areas, they're nicely profitable businesses with leadership positions in their respective markets.

At $39 a share, ESCO's market capitalization is a cool $1 billion. The company generated $50 million of free cash flow (after capital expenditures and stock compensation) last year, and we can reasonably estimate $60 million-$70 million for this year. This means the investment returns 6.5% on a cash basis, before capital deployment actions. Since investment-grade bonds return 4.75%, the company looks likely to grow. But by how much -- and how sustainable will those returns be?

To figure that out, we'd need to examine how strong the company looks relative to its competitive and industry landscape. Unfortunately, that takes more time and space than we can spare in this article. But we can catch a tiny glimpse of the company's future by looking at order trends and backlog.

Total backlog stood at $387 million at Dec. 31, 2010, a 19% rise from $325 million in the previous year. Orders in the December quarter jumped to $186 million, compared to $138 million in the previous year. These healthy increases suggest that the business is recovering from the economic slowdown, and growing at a pleasant clip. Indeed, management expects 10%-15% growth in revenue and earnings this year.

The main risks I see lie in product concentration, competition, and growth. Some 22% of ESCO's sales come from one product line in the utility business, with 17% from another product line, and the patents covering these technologies are expiring. ESCO has a good track record despite some earlier patent expiries, but fast-moving technology and competition could encroach on its position. ESCO competes with a host of companies, including Elster Group (NYSE: ELT), Itron (Nasdaq: ITRI), Honeywell (NYSE: HON), Silver Spring Networks, and Landis + Gyr.

Growth could also slow as the domestic market matures. So far, 45% of the United States' 380 million gas, water, and electric meters have been automated, suggesting that the domestic market opportunity is diminishing. Foreign markets, in contrast, have an estimated 2.7 billion meters, and automatic reading technology has penetrated only 5% of that segment. However, foreign sales can take longer to bear fruit.

Smaller risks include the company's 9% of sales to commercial aerospace markets, which are currently strong, but cyclical. The company's filtration business has positions on the Space Shuttle and its successor, Constellation. Given NASA's perpetual funding problems and our era of government belt-tightening, programs like Constellation risk cutbacks or cancellation.

ESCO Technologies has some intriguing businesses and a good outlook, although the current price might already reflect that. I'm adding it to My Watchlist, a tool that lets you track the stocks you want to follow but aren't yet ready to buy.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).