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Pure Cycle (PCYO) Acquires Water Service Rights for $1.6M

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Pure Cycle Corporation (PCYO - Free Report) announced that the Rangeview Metropolitan District ("Rangeview") has entered into an agreement under which Pure Cycle, as the exclusive service provider for Rangeview, will acquire the right to provide water services to Wild Pointe Ranch ("Wild Pointe"), located in unincorporated Elbert County, CO.

The transaction, valued at $1.6 million, will add 120 existing residential and commercial service connections which, at buildout, may even increase to 250. At present, the total annual water service revenue at Wild Pointe amounts to nearly $140,000, which will grow to about $350,000 at buildout.

Completion of development in this region could add another $2.5 million in residential and commercial water tap fees. Pure Cycle is expected to receive the water title in the next 60 days, subject to various closing conditions.

Consolidation — the Need of the Hour

The water utility space is highly fragmented, as there are a number of water utilities in the U.S. operating on various scales, ranging from thousands of customers to millions. The disjointed nature of the industry has raised concerns about whether the smaller systems are sustainable in terms of competence and adaptability. In addition, it is difficult for the smaller water utilities to invest millions of dollars in upgrading the existing infrastructure, and replacing old and dilapidated pipelines.

A solution to this could be the consolidation and integration of local and regional systems into large-scale structures. This would free up access to capital markets for infrastructure development in order to ensure reliable water services. In fact, this explains the frequent acquisitions taking place in this space right now.

Big players in the water industry are getting even bigger through a number of acquisitions and are becoming increasingly capable of large infrastructural spending.

American Water Works Company (AWK - Free Report) has completed several acquisitions in the first nine months of 2016, adding 10,700 customers to its existing base. The company aims to boost its total customer base by 79,500 through acquisitions in 2016. Its pending acquisitions are expected to add another 68,800 customers and are presently in various stages of the approval process.

Another water utility Aqua America Inc. is equally active in expanding its market reach through acquisitions. Year to date (as of Nov 1, 2016), the company has completed a number of acquisitions in its service territories, adding 5,700 customers to its existing base. Acquisitions and organic growth have boosted the company’s customer base by more than 1.3% so far this year. Thanks to strategic acquisitions and organic growth, the company expects its customer base to expand 1.5% to 2% this year. The pending acquisitions are projected to add another 4,700 customers to its existing base.

Price Movement

Over the last one year, Pure Cycle has been underperforming the Zacks categorized Utility–Water Supply industry. During this period, the company’s shares have gained 17.7%, compared with the industry’s return of 28.4%.



Zacks Rank & a Key Pick

Pure Cycle currently has a Zacks Rank #3 (Hold). A better-ranked stock in the same space is SJW Group (SJW - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SJW’s earnings surpassed the Zacks Consensus Estimate by 104.4% in the last reported quarter. Its 2016 estimates improved 26.1% to $2.27 in the last 60 days.

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