American Water Arm to Invest $9.5M to Improve Water Services

Zacks Equity Research

American Water Works Company AWK announced that its subsidiary Illinois American Water is going to invest nearly $9.5 million to improve the water services that it provides to customers in the Peoria area. The investment will be directed to replace 6.6 miles of water mains and rehabilitate two overhead water tanks in the area.

This move will help the company to strengthen its existing water infrastructure in this region and serve customers more efficiently. Illinois Water has been investing on a regular basis to upgrade, maintain and expand water operations. Earlier this month, the company decided to invest $0.65 million to improve water services in the Pontiac area. (Read more: American Water Arm to Invest $0.65M in Water Treatment)

Investment Essential for Water Industry

The existing U.S. water and wastewater infrastructure is old, and requires immediate attention. Massive funding is needed to upgrade the quality of the U.S. water infrastructure. Per an American Water Works Association (“AWWA”) report, the cost of restoring aging underground water pipelines in the United States will be at least $1 trillion in the next 25 years.

The AWWA report also indicates that in excess of 7 billion gallons of water leak out of aging pipelines due to more than 200,000 water line breaks per year in the United States. Regular investment in the water space will help in replacing the aging water infrastructure and prevent the wastage of precious resources.

American Water aims to invest within $8-$8.6 billion from 2019 through 2023. The current investment of Illinois American Water is part of the company’s long-term investment plan. Apart from American Water, water utilities like Aqua America Inc. WTR announced that it is going to invest more than $555 million in 2019 to strengthen its water and wastewater infrastructure. This will be part of Aqua America’s investment target of more than $1.4 billion in the 2019-2021 time period.

Consolidation Can Support the Water Industry

The U.S. water industry is highly fragmented and creates operational challenges for small operators. At present, only 7% of the country’s systems serve populations of more than 10,000 and a mere 1% serve populations in excess of 100,000. Hence, consolidation in this highly fragmented industry is essential. Big water companies are trying to acquire small water utilities and extend quality services.

Merger synergies and decline of repetitive operating costs allow large companies to provide quality services to customers. American Water, which is one of the most active players in the water space, has already completed a few acquisitions in 2019. In addition to American Water, Global Water Resources, Inc. GWRS, among other water utilities, is following the acquisition route to expand operations.

Price Movement

Year to date, shares of American Water have outperformed the industry.

Zacks Rank and Key Pick

Currently, American Water has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked water utility in the same space is Middlesex Water Company MSEX, currently sporting a Zacks Rank #1.

Middlesex Water reported average positive earnings surprise of 19.72% in the last four quarters. The Zacks Consensus Estimate for 2019 and 2020 has moved up 5.8% and 4.7%, respectively, in the past 60 days.

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