For many years now, environmentalists have been dreaming of a so-called “smart grid” that will better manage electricity consumption. A smart-grid would help utility companies gather energy-consumption information and use it to improve efficiency, spending and sustentability of electricity.

Also for years, wireless communication has become commonplace, especially since the advent of cellphones and wireless broadband. The union of these two ideas, however, is a relatively new idea. It’s also a significant off-the-radar opportunity for forward-thinking investors.

Most investors may not be familiar with the term “smart-metering.” Indeed, it’s possible some utility customers may not even realize a smart meter is monitoring their usage of electricity and remotely communicating that information — in real time — to their utility provider. The purpose is two-fold: to properly bill for the amount of energy used and, more important, to analyze how and when electricity is consumed so less is used in the future. 

Though there are a handful of companies like Sierra Wireless (Nasdaq: SWIR), CalAmp (Nasdaq: CAMP) and Numerex (Nasdaq: NMRX) helping to usher in this appropriately-named machine-to-machine era, it’s ESCO Technologies (NYSE: ESE) that’s making smart-metering — and the ensuing smart grid — all that they should be. 

Right time, right place
In 2010, global sales of smart meters quietly reached $4.38 billion, thanks to the installation of a little more than 25 million meters. By 2016, the global smart meter market is expected to almost quadruple to $15.2 billion, with a projected 104 million meters to be installed that year. That’s roughly a 21% annualized growth rate, making the industry one of the more promising growth arenas for the next few years.

Those are big numbers, though ESCO Technologies is eager to point out that this only scratches the surface. In North America alone, there are 380 million various utility meters measuring the consumption of everything from natural gas to electricity to water. Globally, the meter count jumps to 2.7 billion. With less than a 2% penetration of the global market (by anyone), there’s plenty of room for growth.

Given how ESCO has established itself as a top name in the industry, it has the right reputation it needs to maintain its market leadership.

Take its gas-metering contracts with Pacific Gas & Electric (NYSE: PCG) and Sempra Energy’s (NYSE: SRE) Southern California Gas, for example. These are the two biggest natural gas utilities in North America and, between the two, they are expected to buy more than 10 million smart meters during the next few years. These two deals alone underscore how esteemed ESCO Technologies is within the utility-metering industry.

ESCO has also won big water-metering contracts in New York, Washington D.C. and Toronto, and controls 60% of the electricity co-op market for new meters. In addition, the company has further entwined wireless communications with utilities management. It has just unveiled a partnership with utility bill-payment service provider PayGo. Any utility customer utilizing ESCO’s smart meters can now pay their bill with a smartphone, deepening the merger of the two technologies, and therefore deepening ESCO’s foothold within the industry.

Already proven
While the future certainly looks compelling for smart-meter makers, veteran investors know all too well how forecasts and projections can end up being nothing more than the pipedreams of a company that’s got little else going for it.

That’s not ESCO, though. 

In fact, ESCO Technologies has been persistent with earnings and revenue growth. While sales have only grown during the past four quarters (to $688.4 million from $396.7 million), revenue has grown in seven of the past nine years. And, even in 2009 and 2010 when revenue slumped, the top line only fell by 0.8% and 1.8% during those years.

Likewise, earnings grew steadily to $46.88 million in 2012 from 2004’s $35.67 million, but only twice (2006 and 2010) did they fall on a year-over-year basis. Better still, not once since 2004 has ESCO Technologies booked an annual loss. All told, revenue has grown at an average annual rate of 10% since 2007, while EBITDA has grown at an annual rate of 12% during the same period.

The secret to the company’s consistent success is diversity. ESCO makes more than just utility meters. The company’s fluid filtration (used primarily in the aviation market; 39% of fiscal 2012 EBIT) and radio-frequency-shielding divisions (used in medical and other testing facilities; 14% of fiscal 2012 EBIT) are also important additions to the entire bottom line. 

That consistency — with more of the same kind of growth in the cards — justifies the trailing price-to-earnings (P/E) ratio of 24, which is still well below the industry average of almost 32. The forward P/E ratio of 14.6 further sweetens the pot. 

Risks to Consider: While no one is in favor of wasting energy, the market hasn’t fully embraced smart meters. Though there are a few ways to facilitate the purchase of a smart meter, in the end, the cost is passed on to consumers, either through higher utility bills, tariffs, or simply charging customers for the equipment. While they’re generally worth the expense no matter how it’s passed along, unhappy utility customers have the power to at least partially put the brakes on the industry’s growth.

Action to Take– > Though several companies are dancing all around the unison of wireless communications and utility metering, ESCO Technologies is the only one that’s hitting that nail directly on the head. It’s admittedly trading at a frothy valuation (though not expensive when compared to industry peers), so for investors who are willing to wait a year or more, it’s a price that should prove worth paying. 

The smart-metering industry is close to hitting a critical mass and ESCO Technologies is poised to award early investors with double-digit growth rates. Don’t wait too long before you jump at this opportunity.

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