Back to top

Image: Bigstock

Sparkling Outlook for Water Supply Industry Amid Coronavirus

Read MoreHide Full Article

The Zacks Utility - Water Supply industry includes companies that are involved in providing drinking water and wastewater services to industrial, commercial and residential customer classes. The water utilities also provide services to numerous military bases across the United States.

Water utility operators own one million miles of pipelines that are buried under soil. Moreover, they own water treatment plants and desalination plants to supply potable water 24X7 across customer classes. The outbreak of the novel coronavirus has again highlighted the importance of potable water and wastewater services as maintaining hygiene is one of the primary ways to keep this highly infectious virus at bay.
 

Let’s take a look at the three major industry themes:
 

  • Water continues to play a critical role in preventing the spread of COVID-19. Washing hands properly with soap at regular interval is the primary way of not getting infected and breaking the chain of the infection. Water utilities are also extending 24x7 water and wastewaters services to their customers across the United States, ignoring non-payment of water and wastewater service dues. Industry participants are restoring services previously disconnected and waiving penalties for nonpayment. Amid the unprecedented economic crisis, a few water utilities are continuing with planned capital projects to efficiently serve their current and future customers.
     
  • Per the United States Environmental Protection Agency (“EPA”), COVID-19 has not been detected in drinking-water supplies and based on current finding, the risk to water supplies is low. Hence EPA advises Americans to continue using and drinking water from their taps as usual. The gradual reopening of the economy and hotter summer temperatures are likely to increase demand for potable water. However, per the finding of Utah State University, between 250,000 and 300,000 line breaks occur every year in the United States due to aging of existing water infrastructure, which results in wastage of huge volumes of potable water each day. According to the American Water Works Association, an estimated $1 trillion investment is necessary to maintain and expand drinking water service to meet demand over the next 25 years. So huge effort is needed from private operators and funding is required from government agencies to upgrade and maintain aging water and wastewater facilities.
     
  • Consolidation is the need of the hour in the very fragmented water utility industry. At present more than 53,000 water systems in the United States are providing water solutions to customers. The highly fragmented water industry creates operational challenges in meeting or increasing requirement for replacement, and adding to aging water and wastewater infrastructure. At present, only 7% of the country’s systems serve a population of more than 10,000 and a mere 1% of the systems serve a population of more than 100,000. Acquisitions of small water utilities by bigger companies ensure extension of high-quality services to customers and upgrade of assets of small service providers. Water conservation and initiatives taken by large water operators in educating their consumers on efficient usage and appliances to detect leakage will help to prevent wastage.


Zacks Industry Rank Indicates Strong Prospects

The Zacks Utility Water Supply industry is a 12-stock group within the broader Zacks Utilities sector.  The industry currently carries a Zacks Industry Rank #63, which places it in the top 25% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions it appears that analysts are optimistic about this group’s earnings growth potential. Water Utility industry’s 2020 earnings estimates moved up 38.1% year over year to $2.21.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation.


Industry Outperforms S&P 500 and Sector

The Zacks Utility Water Supply industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months. The industry has gained 11.2% in the past 12 months compared with the S&P 500’s rally of 5.4% and its sector’s growth of 3.6%.
 



One Year Price  Performance


Industry’s Current Valuation
 

On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing water utility stocks, the industry is currently trading at 12.76X compared with the S&P 500’s 11.95X. It is trading below the sector’s trailing 12-month EV/EBITDA of 18.46X.

Over the past five years, the industry has traded as high as 14.54X, low of 10.02X and at the median of 11.9X.


Water  Supply Industry vs  S&P  500 ( Past 5 yrs)
 


Water  Supply Industry vs  Utility Sector ( Past 5 yrs)
 


Summing Up

In this COVID-19-induced crisis, demand for potable water will increase in the United States and globally. With demand for potable water growing in the United States, an increasing number of desalination plants have been pressed into service. Per an International Desalination Association report, more than 2,000 desalination facilities are operational in the United States and the number is gradually rising.

Below we present four stocks — three carrying a Zacks Rank #2 (Buy) and one holding a Zacks Rank #3 (Hold) — that are well positioned to grow in this fragmented water space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy)  stocks here

American Water Works (AWK - Free Report) , based in Camden, NJ, is engaged in providing water services to over 15 million customers in 47 states, the District of Columbia and Ontario, Canada. The Zacks Consensus Estimate for 2020 and 2021 EPS has improved 0.3% and 0.5%, respectively, over the past 90 days. The stock carries a Zacks Rank #2.

 

Price & Consensus: AWK
 

Essential Utilities, Inc, (WTRG - Free Report) is a water and natural gas service provider. The company has a well spread out water infrastructure to provide quality services to its expanding customer base. It has diversified operation through the acquisition of Peoples Gas, a natural gas distribution utility. The Zacks Consensus Estimate for 2020 earnings has remained unchanged over the past 90 days but that for 2021 earnings has improved 1.2% over the past 90 days. The stock carries a Zacks Rank #2.


Price & Consensus: WTRG


Consolidated Water Co., (CWCO - Free Report) along with its subsidiaries, is involved in the development and operation of seawater desalination plants and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent. The Zacks Consensus Estimate for 2020 earnings has improved 48.6% over the past 90 days. The stock carries a Zacks Rank #2.

Price & Consensus: CWCO

American States Water Company (AWR - Free Report) , based in San Dimas, CA along with its subsidiaries provides fresh water, wastewater services and electricity to its customers in the United States. The Zacks Consensus Estimate for 2020 and 2021 earnings has improved 1.8% and 2.5%, respectively, over the past 90 days. The stock has a Zacks Rank #3.

Price & Consensus: AWR

Zacks Top 10 Stocks for 2020

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2020?

Last year's 2019 Zacks Top 10 Stocks portfolio returned gains as high as +102.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.


Access Zacks Top 10 Stocks for 2020 today >>