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. These 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, provides services to domestic customers and military bases and offers an excellent opportunity to stay invested in the water utility space. Other water utilities worth adding to your portfolio are Companhia de Saneamento Basico do Estado de Sao Paulo SBS, American States Water Company AWR and SJW Group SJW.
About the Water Supply Industry
The Zacks Utility - Water Supply industry includes companies that provide drinking water and wastewater services to industrial, commercial and residential customers and military bases. 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 to customers. The highly fragmented industry creates operational challenges, but increasing efficient water usage by individuals and other industries helps ensure that water is not wasted. The capital-intensive water utility operators will benefit from the interest rate cuts and continue with their capital expenditure at reduced capital servicing expenses.
3 Trends Pivotal for Shaping the Water Supply Industry's Future
Interest Rate Decline is a Tailwind: In order to maintain, upgrade and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has finally lowered the benchmark rate by 50 basis points, bringing down rates to a range of 4.75%-5%. The rates were lowered for the first time in four years. Capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.
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. It is evident that this industry needs more investments for maintenance and upgrade. Per the U.S. Environmental Protection Agency (“EPA”), an estimated $963 billion investment is necessary to maintain and expand the drinking water and wastewater service to meet demand over the next 20 years. The massive investment requirement also creates an opportunity for growth among operators in this space. 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 toward upgrading water infrastructure serving disadvantaged communities. ASCE gives a C- rating to the U.S. drinking water infrastructure and a D+ to the U.S. wastewater infrastructure.
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 the ASCE, at present, 50,000 community water systems and 14,000 wastewater treatment systems in the United States are providing water solutions to customers. Per the ASCE finding, due to the delay in pipeline repairs and maintenance, millions of gallons of treated water are lost every year in the United States. The 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 players 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 to educate their consumers on the efficient use of appliances and detecting leakage should help prevent wastage.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Utility Water Supply industry is a 13-stock group within the broader Zacks Utilities sector. The industry currently carries a Zacks Industry Rank #93, which places it in the top 37% of more than 251 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth.
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.
Water Supply Industry Lags S&P 500 & Sector
The Zacks Utility Water Supply industry has underperformed the Zacks S&P 500 composite and its sector in the past 12 months. The industry has gained 18% compared with the Utility sector’s rally of 22.2%. The Zacks S&P 500 composite has advanced 33.6% in the same time frame.
One-Year Price Performance
Industry Trading at a Discount to Sector & S&P 500
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 13.85X compared with the S&P 500’s 19.2X and the sector’s trailing 12-month EV/EBITDA of 15.15X.
Over the past five years, the water supply industry has traded as high as 23.28X, as low as 9.96X and at the median of 15.65X.
Water Supply Industry vs. S&P 500 (Past 5 Years)
Water Supply Industry vs. Utility Sector (Past 5 Years)
Water Utility Industry Stocks to Watch Now
Below, we have discussed four stocks from the Zacks Utility- Water Supply industry with strong growth potential. All these stocks either have a Zacks Rank #2 (Buy) or sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
American Water Works Company: Camden, NJ-based American Water, along with its subsidiaries, provides water and wastewater services to millions of Americans. The company continues to expand operations through acquisitions and organic means. American Water Works plans to invest $3.1 billion in 2024 to strengthen and expand its existing infrastructure. AWK aims to invest in the range of $16-17 billion during the 2024-2028 period.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has moved up by nearly 0.6%. The long-term (three to five years) earnings growth of the company is currently pegged at 8%. The current dividend yield of the company is 2.08%, better than the Zacks S&P composite’s yield of 1.57%. The company delivered an average four-quarter surprise of 1.1%. The company currently has a Zacks Rank #2.
Price and Consensus: AWK
Companhia de Saneamento Basico do Estado de Sao Paulo: Sao Paulo, Brazil-based SABESP supplies treated water and sewage services to residential, commercial and industrial private customers. The company plans to invest $12.3 billion (R$68 billion) in the 2024-2028 period to strengthen its water and wastewater infrastructure.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has moved up nearly 1.9%. The current dividend yield is 1.24%. The company delivered a positive earnings surprise of 30.8%. SABESP currently sports a Zacks Rank #1.
Price and Consensus: SBS
American States Water Company: San Dimas, CA-based American States Water, along with its subsidiaries, provides water, wastewater and electric services to its customers. AWR provides long-term water and wastewater services to military bases and continues to pursue new long-term contracts from more military bases. It aims to invest $531.7 million during 2025-2027.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has moved up nearly 0.7%. The company’s long-term earnings growth rate is 6.3%. The current dividend yield is 2.21%. It delivered an average earnings surprise of 3.4% in the last four quarters. The company currently has a Zacks Rank #2.
Price and Consensus: AWR
SJW Group: The San Jose, CA-based company, along with its subsidiaries, provides water services to its customers in the United States. The company looks for opportunistic water and wastewater system acquisitions that will continue to support its growth potential. SJW Group aims to invest nearly $1.6 billion during the 2024-2028 period to build and maintain its water and wastewater operations, and water and wastewater infrastructure to provide a safe and reliable service to its customers.
Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has moved up 0.4% to $2.76 per share. The company’s long-term earnings growth rate is 7.5%. SJW reported an average earnings surprise of 9.3% in the last four quarters. The current dividend yield is 2.74. SJW currently has a Zacks Rank #2.
Price and Consensus: SJW
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