Water utilities work day in and day out to ensure an uninterrupted supply of clean potable water and reliable sewer services to millions of customers in the United States, which are essential for healthy and hygienic living.
The aging of pipelines is concerning, but water utilities continue with their upgrade and maintenance projects to minimize disruptions in operations. American Water Works Company AWK, with its widespread operations, systematic capital expenditure, and organic and inorganic initiatives to further expand operations, offers an excellent opportunity to stay invested in the water utility space. Other utilities worth retaining in one's portfolio are Essential Utilities WTRG, The York Water Company YORW and Global Water Resources, Inc. GWRS.
About the Industry
The Zacks Utility - Water Supply industry includes companies providing drinking water and wastewater services to industrial, commercial, residential customer classes and numerous military bases across the country. Water utility operators own nearly 2.2 million miles of pipelines that are getting old. Utilities continuously replace old pipelines and add new ones to expand operations. Utility operators own storage tanks, treatment plants and desalination plants to supply uninterrupted potable water across customer classes. Despite the ample presence of water across the globe, less than 1% of the total water volume is fit for human use. Given the scenario, the water utilities, apart from ensuring proper infrastructure to supply water, utilize technology to treat saline water and make it fit for consumption.
3 Trends Pivotal for Shaping the Water Supply Industry's Future
Aging Infrastructure Needs Huge Investments: The water and wastewater infrastructure is aging and gradually nearing the end of its effective service life. Per the findings of the American Society of Civil Engineers (“ASCE”), water main breaks occur every two minutes in the United States due to the aging of the existing water infrastructure. The ASCE has provided a D+grade to the overall U.S. water and wastewater infrastructure. Per the U.S. Environmental Protection Agency (“EPA”), an estimated $744-billion investment is necessary to maintain, and expand the drinking water and wastewater service to meet demand over the next 20 years. The Bipartisan Infrastructure Law provided $50 billion to EPA to strengthen the drinking water and wastewater systems of the United States. A major portion of the investment will be directed to upgrading water infrastructure serving disadvantaged communities.
Efficient Use is Saving Precious Water: An interesting trend in the water industry is reducing per-capita water usage. The reasons for the drop are the use of water-efficient techniques, raising awareness among customers by the water utilities, the use of advanced water-efficient appliances and actions taken to fix pipeline leaks. Lower use per person allows water utilities to meet the need of an expanding customer base without increasing capacity to a great extent. In a way, efficient usage and a reduction in wastage allow water utilities to keep their service rates unchanged for a longer period for consumers and assist water utility operators in increasing their earnings by serving a larger population with the same water supply capacity.
Fragmented Water Industry Needs Consolidation: Since the U.S. water utility industry is highly fragmented, upgrading aging assets to provide quality services is the need of the hour. Per ASCE, at present, 50,000 community water systems and 16,000 community wastewater systems in the United States are providing water solutions to customers. Per the ASCE finding, due to the delay in essential pipeline repairs and maintenance, 6 billion gallons of treated water is lost every day in the United States. The highly fragmented industry creates operational challenges in meeting the requirement for replacement, and adding to the aging water and wastewater infrastructure. Large water utility companies continue to acquire small companies to ensure the extension of high-quality services to customers and the investment required to upgrade old and acquired assets. Water conservation and initiatives taken by large water operators in educating their consumers on efficient use and appliances to detect leakage should help to prevent wastage.
Zacks Industry Rank Indicates Bleak 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 #139, which places it in the bottom 45% 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 weak 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The Water Utility industry’s 2022 earnings estimates have declined 4.9% since November 2021 to $2.13.
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 Lags Sector but Outperforms S&P 500
The Zacks Utility Water Supply industry has lagged its sector but outperformed the Zacks S&P 500 composite over the past 12 months. The industry has lost 0.3% compared with the Zacks S&P 500 Composite’s decline of 13.9%. The Utility sector has rallied 1.2% in the said time frame.
One Year Price Performance
Industry's Current Valuation
On the basis of the 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 19.91X compared with the S&P 500’s 12X. It is trading above the sector’s trailing 12-month EV/EBITDA of 19.84X.
Over the past five years, the industry has traded as high as 23.26X, as low as 9.96X and at the median of 13.53X.
Water Supply Industry vs S&P 500 (Past 5 yrs)
Water Supply Industry vs Utility Sector (Past 5 yrs)
4 Water Utility Industry Stocks to Keep an Eye On
American Water Works Company: Camden, NJ-based American Water, along with its subsidiaries, provides water and wastewater services to millions of Americans. AWK continues to expand operations through acquisitions and plans to invest $14-$15 billion in the 2023-2027 period and $30-$34 billion in 2023-2032. AWK is also active in making acquisitions and benefits by expanding operations in the United States through the inorganic route. In the past month, AWK gained 9.9% compared with its industry’s growth of 6.3%.
Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved up 0.2% to $4.46 per share. The long-term (three to five years) earnings growth of the company is currently pegged at 8.08%. The current dividend yield of the company is 1.78%. The company reported an average surprise of 7.38% in the last four quarters. American Water currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: AWK
Essential Utilities: The Bryn Mawr, PA-based company, along with its subsidiaries, provides water, wastewater and natural gas services to customers. WTRG has a well-spread water infrastructure and has diversified its operations through the acquisition of Peoples Gas, a natural gas distribution utility. WTRG’s long-term plan is to invest $3 billion through 2024 to rehabilitate and strengthen water and natural gas pipeline systems. In the past month, the stock has returned 10.4%.
Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has been unchanged. The long-term earnings growth of the company is currently pegged at 6.14%. The current dividend yield of the company is 2.44%. Essential Utilities currently has a Zacks Rank #3.
Price and Consensus: WTRG
The York Water Company: The York, PA-based company provides drinking water and wastewater services. The company is investing systematically to upgrade infrastructure and provide quality services to its customers. York Water plans to invest nearly $45 million in strengthening its infrastructure. It plans to make systematic investments to further strengthen its operations. In the past month, the company has returned 8.1% to its shareholders.
Over the past 60 days, the Zacks Consensus Estimate for 2022 and 2023 earnings has moved up 1.5% and 1.4%, respectively. The company reported an earnings surprise of 5.46% in the last four quarters. The current dividend yield of the company is 1.74%. York Water currently has a Zacks Rank #2 (Buy).
Price and Consensus: YORW
Global Water Resources: The Phoenix, AZ-based company, along with its subsidiaries, provides water services to its customers in the United States. Global Water Resources invests capital in existing utilities to increase revenues, reduce expenses and build a rate base to provide a safe and reliable service to customers. Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved up by 5% to 21 cents per share. Global Water Resources’ current dividend yield is 2.41%. The long-term earnings growth of the company is currently pegged at 15%. GWRS currently has a Zacks Rank #2.
Price and Consensus: GWRS
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