With option expirations last Friday, many of the options I had written have expired. Generally speaking that was a good thing for me, as it meant I was able to keep the option premium. It also meant that I had to reload many of the positions, which I did yesterday.

There were a couple of situations in which I would have done better by simply buying or selling the stock outright rather than selling the options. In other cases, I would have fared worse. Over the long term, I think the option writing strategy will be more rewarding and less risky than a stock-only strategy.

The new option positions I have written (all expiring in June) are:

• Coach (COH) $35 puts
• Hansen Natural (HANS) $30 calls
• Radioshack (RSH) $15 puts
• Ansys (ANSS) $45 call options
• Starbucks (SBUX) $17 call options
• Adobe (ADBE) $45 call options
• Ceradyne (CRDN) $40 put options
• Nutrisystem (NTRI) $20 put options

I also sold outright a position in Itron (ITRI), which was too few shares to cover with a call option. I had a nice profit on the shares, but they have been acting punk lately and I’m a little worried about the potential for new smart meter competition. I might be interested in getting back at a cheaper price.

Disclosure: Obviously, at the time of publication William Trent has a financial position in all of the companies mentioned in this article with the exception of Itron.

Disclosure: Author is long Starbucks (SBUX) at time of publication.

The latest Fortune Magazine has an article titled: Can this man save the grid?

According to the Edison Electric Institute, utilities over the next 20 years will spend hundreds of billions of dollars on infrastructure improvements, including computers, sensors, and networking systems….

One of the players best positioned to capitalize on the rollout of the smart grid is a Silicon Valley entrepreneur named Ray Bell. Bell, 52, a veteran of Oracle (ORCL - Annual Report), Cisco (CSCO), and a network services company he started called SmartPipes, has focused on what may be the most profitable component in the new system: the electric meter that sits in your basement and ticks off the watts as you consume them.

I have been an owner of the market leader in smart meters, Itron (ITRI), for some time. I found the article interesting because it uncovers a potential competitor I hadn’t previously worried about.

It costs roughly $300 apiece to replace them with one of Bell’s so-called smart meters. Southern California Edison will spend $1.7 billion over the next four years to equip 5.3 million homes with smart meters made largely by competitor Itron, based in Liberty Lake, Wash. Bell thinks he has made a better one.

That doesn’t bother me much. Of course Bell thinks his is better, otherwise he wouldn’t have bothered to make it. History is littered with products that are technologically better but fail in the marketplace. More worthy of concern, to me, is his sales force.

He has some important backers. His main partner is the biggest, most dependable name in the business: General Electric (GE - Annual Report).

GE gives instant credibility, clout and power to the product, as well as making it possibly less likely that GE would want to acquire Itron.

There’s probably enough room in the market for both players, but it is worth keeping an eye on the potential competitive effects.

Disclosure: At time of publication, William Trent owns shares of Itron (ITRI).

Itron to Change Independent Registered Public Accounting Firm:

As a result of Itron’s (ITRI) acquisition of Actaris Metering Systems (Actaris) on April 18, 2007, the Audit/Finance Committee undertook a review of both Deloitte and E&Y as Itron’s independent accountants. E&Y served as Actaris’ independent accountant since Actaris’ formation in 2001.The Audit/Finance Committee conducted a comprehensive review and evaluation of both firms. Following the review, the decision was made to select E&Y.

According to Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition, investors should be wary of firms that change auditors:

Changes could offer clues to financial shenanigans, especially in those cases in which the auditors may have been fired because they found some problem that they were willing to supress.

A company that fires its auditor because of a disagreement over financial principles and then shops around for a new auditor that is more agreeable to its interpretation of GAAP has engaged in what is known as “opinion shopping.” To prevent this practice, the SEC requires a company that changes auditors to file a Form 8-K, notifying the commission of the termination and giving the details of any accounting disagreements. Unfortunately, few disagreements are ever actually disclosed in these filings.

That “unfortunate” lack of real disclosure is why investors generally should be wary of auditor changes even when no disagreements are noted. However, the acquisition of Actaris meant that one of the two auditors would be let go, and while it is a bit of a surprise that the parent company’s auditor lost out I don’t consider it particularly alarming. Instead, it will be more important to monitor the future filings for any changes to accounting methods or assumptions that may be made. Those can then be evaluated on a case by case basis.

When we previewed earnings for Itron (ITRI) we said there was “risk to estimates in both directions due to Actaris acquisition.” That turned out to be even more correct than we anticipated. Itron Announces First Quarter Results:

Itron, Inc. (NASDAQ:ITRI - News), today reported financial results for its first quarter ended March 31, 2007. Highlights include:* Quarterly revenues of $148 million;
* Quarterly GAAP diluted EPS of 26 cents per share;
* Quarterly non-GAAP diluted EPS of 43 cents per share; and
* Quarterly EBITDA of $22 million.

Analysts were expecting the company to report $0.49 of EPS on $146 million in sales. In addition to coming up short, the indications for future revenue are also soft.

New Order Bookings and Backlog — New order bookings for the first quarter were $118 million, compared with $206 million in the first quarter of 2006. New order bookings in 2006 included bookings for three large mobile AMR deployments. Our first quarter 2007 book-to-bill ratio was .9 to 1. Total backlog was $376 million at March 31, 2007 compared to $392 million at December 31, 2006. Twelve month backlog of $225 million at March 31, 2007 remained level with twelve month backlog at the end of 2006.

For the full year 2007, we expect

• Revenues between $1.40 billion and $1.43 billion;
• Diluted non-GAAP EPS of between $2.60 and $2.90 (includes approximately $0.30 of stock-based compensation expense); and
• EBITDA in excess of $230 million

Second quarter revenues are expected to be between $370 and $390 million.

The revenue estimate for next quarter is not comparable to the $174 million analyst consensus made prior to the Actaris acquisition, nor is the full year estimate. The consensus expects $2.72 in EPS for the year. So Itron managed to demonstrate risk to the estimates in both directions simultaneously.

The Economic Calendar has three potentially important events this week:

• Personal Income and Outlays on Monday (consensus 0.6% income, 0.5% spending)
• ISM Manufacturing on Tuesday (consensus 51)
• The Employment Situation on Friday (consensus 100,000 jobs added, 4.5% unemployment)

Earnings season continues in full force.

Monday

• Verizon (VZ - Annual Report) - possible upside to sales

Tuesday

• Plantronics (PLT) - anyone’s guess, though our long position gives away our own guess

Wednesday

• Cognizant (CTSH) - one of these days the growth will hit a wall, but probably not this day
• Garmin (GRMN - Annual Report) - shouldn’t need a big surprise to move the stock from this level
• Itron (ITRI) - risk to estimates in both directions due to Actaris acquisition
• Sprint (S - Annual Report) - the worst may be over here
• Symantec (SYMC) - Based on MFE and VDSL should have a big quarter

Thursday

• Ansys (ANSS) - Dassault beat big, and we like Ansys better
• QLogic (QLGC) - too risky for our tastes
• Starbucks (SBUX) - probably no surprise, but risk probably to the downside when they are making this kind of move

Disclosure: Long PLT and ITRI

Disclosure: Author is long Starbucks (SBUX) at time of publication.

Itron Completes Acquisition of Actaris Metering Systems: Financial News - Yahoo! Finance

Itron, Inc. (ITRI) announced today that it has completed the acquisition of Actaris Metering Systems (Actaris) for EUR 800 million plus the retirement of debt, or $1.7 billion.

Announced just six weeks ago, the deal closed in record time. As we noted at the time, the deal is being financed primarily with new debt, but Itron generates strong cash flow and will be adding more from Actaris, so it shouldn’t be a big problem. As a result, doubling income while increasing the share count by just 15% seems like a pretty good deal for existing shareholders.

We still think so.

We’re pretty sure this is not the bombshell Itron investors were speculating on, but we like it anyway. Itron has announced it will no longer exclude stock based compensation from non-GAAP earnings:

For 2007, we believe the exclusion of non-cash stock-based compensation expense is no longer necessary to provide comparable financial measures as both 2007 and 2006 periods reflect stock-based compensation expense under SFAS 123(R). In addition, we are no longer excluding non-cash stock-based compensation expense from our executive compensation plans.

Itron joins a number of companies who did things right: they gave us the non-GAAP earnings during the transition year to make for better year/year comparisons to 2005, when accounting rules did not require options to be expensed. Then they stopped doing it, because there are no more problems with comparisons. At this point, we think investors will look askance at any company that continues to insist on excluding this form of compensation from “expenses.”

When Itron (ITRI) announed a large sale recently, we said “make no bones about it: automatic meter reading will be a long-term upgrade cycle, and the fact that a company with a market cap under $2 billion is one of the leaders means a great long-term opportunity for the stock, despite the hiccups they are bound to face along the way.”

Possibly less concerned about those hiccups are the private equity guys who provided some of the capital Itron needed for a recent acquisition. As we said at the time:

The best deal of all was reserved for 10 private equity investors, who were given a discount from the recent trading so as not to disrupt the market price. The $57.50 they paid (which they won’t even have to shell out until Thursday) has already yielded a 17% return.

Did the immediate success they saw on that initial investment merely whet their appetite? The stock is up today heading into a three-day weekend over which important news will be announced, and this week there has been unusually large buying of highly speculative out-of-the-money call options that expire in just over two weeks.

As we said in the other post, Itron generates plenty of cash flow, which would allow the firm to hold significantly more debt than it currently does. This could be an attractive deal for deal-hungry private equity buyers. We see that there is smoke, and we should soon know (possibly as soon as Monday) whether there is fire. We decided to join the fun, and bought a handful of those speculative call options for ourselves. We don’t, however, recommend trying this at home, as the 2-week return if we are wrong is -100%.

We’ve already talked about Itron’s (ITRI) plans to grow through acquisition. Now we see an example of their organic growth/

Itron Lands Largest-Ever International SENTINEL(R) Meter Order

Itron (NASDAQ:ITRI) announced today it has received an order from Mexico’s Comisión Federal de Electricidad (CFE), for 25,000 SENTINEL solid-state electricity meters. CFE is Mexico’s largest electric utility – covering the whole of Mexico – with more than 20 million customers and 163 power-generating plants.The agreement represents Itron’s largest-ever international sale of the highly successful SENTINEL meter. Beyond the initial 25,000 meters, CFE also has the option to purchase an additional 37,000 units over the next year.

Make no bones about it: automatic meter reading will be a long-term upgrade cycle, and the fact that a company with a market cap under $2 billion is one of the leaders means a great long-term opportunity for the stock, despite the hiccups they are bound to face along the way.

Itron Inc., which provides technology to help utilities read their meters remotely, has benefitted from a strong upgrade cycle as utilities seek to cut the costs of manual meter-reading (including treatment for dog bites.) It is therefore no surprise that the company wants to expand the business abroad.
Itron to Pay $1 Billion for Actaris: Financial News - Yahoo! Finance

Itron Inc., a leading supplier of electricity meters in North America, has announced a deal to acquire Actaris Metering Systems of Europe for more than $1 billion.It also will retire some $600 million of the European company’s debt.

The acquisition will more than double the Spokane-area company’s income while expanding its reach to about 300 million Actaris electricity, gas and water meters in 30 countries, according to a news release issued Sunday.

The deal is being financed primarily with new debt, but Itron generates strong cash flow and will be adding more from Actaris, so it shouldn’t be a big problem. As a result, doubling income while increasing the share count by just 15% seems like a pretty good deal for existing shareholders.

But the best deal of all was reserved for 10 private equity investors, who were given a discount from the recent trading so as not to disrupt the market price. The $57.50 they paid (which they won’t even have to shell out until Thursday) has already yielded a 17% return.