Calling a bottom in alternative energy stocks is difficult business: Just look at the Chinese solar module makers that "washed out" several times in 2011 before they really did, (or maybe they still haven't found their bottom).
Here are some key themes in the smart grid stock universe to pay attention to in 2012 that will define the risk/reward scenario.
1. Is legacy revenue from "old school" metering a good or a bad thing?
When you look at stocks like Itron and Elster, one of the knocks on them is that all the stimulus money that drove smart meter deployment in the U.S. is rolling over, and that means growth is done. Absent the continued stimulus money for smart grid, Itron and Elster are poised to be very boring stocks in the short-term with slow growth profiles.
But these companies have the legacy assets to in the least grow, albeit slowly, and are currently trading at sub-10x multiples, so there may be a straight valuation call on these stocks even if the outlook for smart grid deployment remains uncertain.
"It may continue to be a difficult year in terms of fundamentals, but that's priced into the smart meter guys," said Ben Schuman, analyst at Pacific Crest. He expects North American revenue to be down while international -- where all the companies are focused -- ramps. Given that international and emerging market smart grid ramps are uncertain, though, Schuman likes these legacy metering business companies like Elster and Itron for the resiliency, or boring nature, of the core revenue.
"They have legacy revenue that isn't tied to the advanced metering cycle, and the earnings power of the legacy business provides a floor for them," Schuman said. He added, "These stocks aren't likely to go back to 20 times to 25 times multiples, but they can get to a reasonable multiple of 12 times to 13 times with moderate international growth and the core business. At sub-10 times, there is upside."
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