Buried beneath the excitement of Itron's record-breaking revenue for its Network Solutions and Outcomes segments in Q1 2024 lies a potentially overlooked detail: the continued strength of the company's European water meter business. While analysts are busy dissecting the implications of Itron's Grid Edge Intelligence platform and its co-innovation efforts with industry giants like Microsoft, Schneider Electric, and GE Vernova, could they be missing a brewing wave of growth in a seemingly unassuming segment?

The evidence is subtle but persistent. Itron's CFO, Joan Hooper, casually mentions "favorable mix of water sales in Europe, which tend to be a higher margin than some of the other products that we sell," in both the Q4 2023 and Q1 2024 earnings calls. This seemingly innocuous statement, coupled with CEO Tom Deitrich's acknowledgement of a "push on the part of local government, specifically in Western Europe around the water market," suggests a trend worth investigating.

Consider this: in Q4 2023, Itron achieved its highest gross margin since 2017, driven significantly by this European water business. Despite representing a relatively small portion of the company's overall revenue (estimated at 20% - 25%), the water segment consistently outperforms expectations, fueled by the rapid digitization of water infrastructure across Western Europe.

While the electricity market grapples with the complexities of integrating renewables and managing distributed energy resources, the water industry is facing its own set of challenges. Droughts, aging infrastructure, and rising consumer demand for transparency and efficiency are driving a global push towards smart water solutions. Western Europe, with its proactive environmental policies and water scarcity concerns, is at the forefront of this movement.

Itron is perfectly positioned to capitalize on this trend. Its water meter business, with its high-margin products and relatively short sales cycles, could become a silent engine of growth for the company, even as its electricity-focused segments take center stage. This potential "European Water Tsunami" is supported by several factors:

Governmental Push: Deitrich specifically highlights the proactive role of Western European governments in pushing for water market modernization. This translates into concrete policies and financial incentives that are accelerating the adoption of smart water solutions.

Water Scarcity: Western Europe, particularly regions like Southern France and Spain, face increasing water stress. This scarcity is driving a greater need for efficient water management, which smart metering technologies can address.

Shorter Sales Cycle: Unlike large-scale AMI projects for electricity grids, which often involve lengthy regulatory approval processes, water meter deployments tend to be smaller in scale and have shorter sales cycles. This allows Itron to recognize revenue quicker and contribute to a more consistent growth trajectory.

High Margins: Hooper consistently emphasizes the higher margins associated with Itron's water sales in Europe. This suggests a favorable pricing environment, potentially driven by the specialized nature of the technology and a less competitive landscape compared to electricity metering.

Could European Water Be Key to Itron's Growth?

Could this European water gambit be the key to unlocking Itron's long-term growth potential? While the company's Investor Day presentation focused primarily on its 2027 outlook for the electricity-focused Networks and Outcomes segments, the water business remains a wildcard.

If Itron's European water business continues its current growth trajectory and maintains its high-margin profile, it could contribute significantly to the company's overall revenue and profitability. While currently representing an estimated 20% - 25% of revenue, a sustained 10% - 15% annual growth rate in this segment, coupled with its higher margins, could see it becoming a much more significant contributor to Itron's bottom line within the next few years. This growth potential, combined with Itron's core electricity-focused businesses, presents a compelling investment thesis that may be currently undervalued by the market.

Market Expansion: Continued policy support and water scarcity concerns could drive further expansion of the smart water market in Western Europe.

Competition: The competitive landscape in the European water meter market remains a factor to monitor. While less intense than electricity metering, the entry of new players or aggressive pricing strategies from existing competitors could impact Itron's margins.

IIJA Funding: While Itron anticipates IIJA funding to primarily benefit its electricity-focused segments, it is worth exploring if any of these funds could be directed towards water infrastructure projects, providing a further tailwind to the European water business.

Revenue Growth Comparison (Hypothetical)

The following chart illustrates a hypothetical scenario where Itron's European water business grows at a faster pace than its Network Solutions segment.

Itron's European water business presents a unique opportunity for investors seeking exposure to the rapidly growing smart water market. While currently overshadowed by the company's electricity-focused segments, the European water gambit could prove to be a silent but potent force in Itron's long-term success.

"Fun Fact: The average person in Western Europe uses about 150 liters of water per day. With smart metering technology, water utilities can identify and address leaks, reducing water waste and saving consumers money."