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Bright Water Utility Industry Outlook With Reducing Rates

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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.

The water utility operators own millions of miles of water pipelines that are buried under soil. Moreover, they own water treatment plants and desalination plants to supply 24X7 potable water across customer classes.

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

  • The U.S. Environmental Protection Agency (“EPA”) announced contribution of $2.6 billion to the State Revolving Funds to ensure that Americans have safe water for drinking and recreation. In the last three decades, the State Revolving Funds have provided more than $170 billion in financial assistance to over 39,900 water quality infrastructure projects and 14,500 drinking water projects across the country. Per EPA estimates, more than $744 billion is needed for U.S. water and wastewater infrastructure improvement. Recently, EPA announced that 38 new projects in 18 states were selected and are being invited to apply for Water Infrastructure Finance and Innovation Act (WIFIA) loans. These projects will apply for loans of more than $6 billion and help in providing quality water services to over 24 million consumers.
     
  • Per an American Water Works Association report, more than 200,000 water lines break per year in the United States, resulting in 7 billion gallons of water leaking out of aging pipes. It is quite evident that government funding is not expected to increase dramatically in the near term, so regulated companies in the water space will have to take an initiative to upgrade water and wastewater infrastructure to control and check wastage. Reduction in the interest rates thrice in the recent times will help the water companies to source funds at a cheaper rate and continue with long-term capital projects to provide quality water and wastewater services to different categories of customers.
     
  • 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 addition to the 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. Acquisition of small water utilities by the bigger companies are ensuring extension of high-quality services to customers and upgrade of assets of the small service providers.


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 #105, which places it at the top 42% 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.
 
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 33.8% in the past 12 months compared with the S&P 500’s increase of 13.6% and its sector decline of 4.9%.



One Year Price  Performance




The 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 14.32X compared with the S&P 500’s 11.23X. It is trading below the sector’s trailing 12-month EV/EBITDA of 19.57X.

Over the past five years, the industry has traded as high as 14.71X, low of 9.58X and at the median of 11.89X.
 
EV/EBITDA
 

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




Water  Supply Industry vs  Utility Sector ( Past 5 yrs)



 
Summing Up

As demand for potable water is growing in the United States, an increasing number of desalination plants are 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. However, the huge gap between the actual investment needed and the amount invested in the water industry is alarming.


Below we present four stocks —two carrying a Zacks Rank #2 (Buy) and two 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


The York Water Company (YORW - Free Report) , based in York, PA, owns and operates three wastewater collection systems and two wastewater treatment systems; and two reservoirs. The Zacks Consensus Estimate for 2019 EPS has improved 1.8% over the last 60 days. Additionally, its 2019 earnings is expected to improve by 10.58% on a year-over-year basis. The stock carries a Zacks Rank #2.


Price & Consensus: YORW



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 2019 EPS has remained the same in the last 60 days. However, 2019 earnings are expected to grow by 9.09% on a year-over-year basis. The stock carries a Zacks Rank #2.


Price & Consensus: AWK




California Water Service Group (CWT - Free Report) , based in San Jose, CA, is a provider of water utility and other related services in California, Washington and New Mexico. The Zacks Consensus Estimate for 2019 EPS has improved 1.5% over the last 60 days. The stock carries a Zacks Rank #3.


Price & Consensus: CWT



Aqua America Inc. (WTR - Free Report) , based in Bryn Mawr, PA, along with its subsidiaries provides water or wastewater services in the United States. The Zacks Consensus Estimate for 2019 EPS has increased by 0.7% in the last 60 days. Additionally, its 2019 earnings is expected to improve by 4.26% on a year-over-year basis. The stock carries a Zacks Rank #3.



Price & Consensus: WTR


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