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Connecticut Water's Buyouts Bode Well, Regulations Sting

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On Nov 16, 2016, we issued an updated research report on Connecticut Water Service Inc. (CTWS - Free Report) . Strategic acquisitions continue to be part of Connecticut Water’s growth strategy. However, stringent environmental regulations, demand variations in tandem with weather fluctuations, risk of failure of water mains, and contamination of water sources are primary concerns for the company.

Recently, Connecticut Water Service reported third-quarter 2016 earnings of 84 cents per share, which lagged the Zacks Consensus Estimate of 85 cents by a penny. However, reported earnings were up 6.3% from the year-ago tally.In the quarter under review, total revenue was $31.3 million, up 2.3% year over year primarily due to higher contribution from the Water Operation segment.

Connecticut Water Service, like some of its peers, has been engaged in strategic acquisitions of smaller water service providers. In the last seven years, the company has made as many as 40 acquisitions, all in sync with its expansion plans. Acquisitions made since 2011 have expanded its customer base by 45%.

During the second quarter, the company inked an agreement to acquire Heritage Village Water Company. The transaction is expected to close by the end of this year and will boost Connecticut Water Service’s customer base by 7,700. Moreover, in the fourth quarter, the company entered into an agreement to acquire The Avon Water Company. Upon completion, thisdeal will boost Connecticut Water’s customer base by 4,800 customers.

Connecticut Water Service derives nearly 94% of its earnings from its regulated operations. Thanks to consistent investments in its regulated operations, the company is able to reliably serve its expanding customer base. The company aims to invest more than $150 million in the 2017–2019 time frame to strengthen its existing water infrastructure.

On the flip side, water operations are subject to extensive federal and state environmental protection, and health and safety laws and regulations. These laws and regulations change frequently and the companies are expected to comply within a stipulated time period, which increase their operating costs. Any failure to comply with regulations might lead to fines and sanctions from regulatory authorities.

Zacks Rank &Key Picks

Connecticut Water Service carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the Utility sector include Atmos Energy Corporation (ATO - Free Report) , ONE Gas, Inc. (OGS - Free Report) and WEC Energy Group, Inc. (WEC - Free Report) .

Atmos Energy has seen one upward estimate revision for fiscal 2017 over the last 30 days. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ONE Gas, another Zacks Rank #2 stock, has seen three upward estimate revisions for 2016 over the last 30 days.

WEC Energy has seen one upward estimate revision for 2016 over the last 30 days. The stock carries a Zacks Rank #2 as well.

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