American Water Works Company, Inc.’s (AWK Quick QuoteAWK - Free Report) subsidiary, Pennsylvania American Water, recently announced that it has signed a deal to acquire Audubon Water Company for $8 million. The deal is expected to close in late 2024, after necessary approvals and add 2,900 customers.

Audubon Water’s assets are located between Pennsylvania American Water’s existing Royersford and Norristown water systems. Pennsylvania American Water, after the completion of the acquisition, will interconnect Audubon’s system with Pennsylvania American Water’s Royersford and Norristown systems, ensuring high-quality water services to its new customers.

Repairs and maintenance of water infrastructure are quite essential to providing high-quality 24x7 services to customers. Within the first five years of the company’s ownership, Pennsylvania American Water plans to invest more than $20 million to upgrade the aging water infrastructure of Audubon Water.

Pennsylvanian American Water has been upgrading and maintaining its water and wastewater infrastructure by methodically replacing old water mains and has invested nearly $490 million in 2022 for infrastructural upgrades. Proper infrastructure maintenance allows it to serve its 2.3 million customers more efficiently.

Fragmented Water Industry Needs Consolidation

The water and wastewater industry is highly fragmented and small service providers don’t have enough financial capability to invest in costly repairs and maintenance of pipelines. The delay in essential repairs and upgrades leads to pipeline breaks and leakages, further causing disruption in services and contamination of potable water.

The acquisition of smaller units by bigger firms with stronger financial capabilities can address this issue. American Water Works, through its subsidiaries, is making systematic acquisitions and taking essential steps to upgrade the old infrastructure of its acquired assets. AWK has added 7,100 customers till Jun 30, 2023, by acquiring five companies. The company’s pending acquisitions (as of Jun 30, 2023), when completed, will add another 74,800 customers to its customer base.

Another water utility, Essential Utilities (WTRG Quick QuoteWTRG - Free Report) , is also making acquisitions to expand its operations. Since 2015, Essential Utilities has expanded utility operations by completing many water and wastewater acquisitions, adding 129,000 customers.

Essential Utilities intends to continue acquiring government-owned and regulated water and wastewater systems that provide services in areas near its existing as well as new service areas. The six acquisitions completed in 2023 added 11,025 customers. At present, there are four pending acquisition deals for a total purchase price of $335.8 million, which, when completed, will add 208,000 customers to its existing customer base.

Price Performance

Over the past three months, shares of AWK have lost 8.4%, narrower than the industry’s 39.6% decline.

Image Source: Zacks Investment Research

Zacks Ranks & Other Stocks to Consider

American Water currently has a Zacks Rank #2 (Buy).

Some other top-ranked companies from the same industry are Consolidated Water Co. Ltd. (CWCO Quick QuoteCWCO - Free Report) and American States Water (AWR Quick QuoteAWR - Free Report) . Consolidated Water sports a Zacks Rank #1 (Strong Buy) and American States Water carries a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

CWCO’s long-term (three- to five-year) earnings growth rate is pegged at 8%. The Zacks Consensus Estimate for 2023 earnings of $1.46 per share indicates an increase of nearly 49% in sales over the past 60 days.

AWR’s long-term earnings growth rate is pegged at 6.3%. The Zacks Consensus Estimate for 2023 earnings of $2.96 per share reflects an increase of 0.3% in sales over the past 60 days.