Chicago, IL – May 4, 2022 – Today, Zacks Equity Research discusses American Water Works Co. AWK, Essential Utilities WTRG and Middlesex Water Co. MSEX.
Industry: Water Utilities
Link: https://www.zacks.com/commentary/1914483/3-water-utility-stocks-to-bet-on-despite-industry-challenges
Water utilities ensure an uninterrupted supply of clean potable water and reliable sewer services to millions of customers in the United States, essential for healthy and hygienic living. Water utilities across the United States are doing this vital task day in and day out.
The aging of pipelines is a concern, but water utilities continue with their upgrade and maintenance projects to minimize disruption in operations. American Water Works Co., 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 include Essential Utilities and Middlesex Water Co.
The Zacks Utility - Water Supply industry includes companies involved in providing drinking water and wastewater services to industrial, commercial, residential customer classes and to numerous military bases across the country. Water utility operators own more than two million miles of pipelines gradually 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.
Aging Infrastructure Needs Huge Investments: The water and wastewater infrastructure is aging and is 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 C-grade to 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 the disadvantaged communities.
Efficient Usage is Saving Precious Water: An interesting trend being observed in the water industry is a reduction in per capita water usage. The reasons behind the drop are the usage of water-efficient techniques, raising awareness among customers by the water utilities, use of advanced water-efficient appliances and actions taken to fix leaks in the pipelines.
Lower usage per person allows the water utilities to meet the need of an expanding customer base without increasing capacity to a great extent. In a way, efficient usage and reduction in wastage allow the water utilities to keep their service rates unchanged for a longer period for consumers and assist the water utility operators in increasing their earnings by serving a larger population with the same water supply capacity.
Consolidation in Fragmented Water Utility Space: Since the U.S. water utility industry is highly fragmented, upgrading the aging assets to provide quality services is the need of the hour. Per EPA, at present, more than 51,000 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, 2.1 trillion gallons of treated water is lost every year in the United States.
This highly fragmented industry creates operational challenges in meeting the requirement for replacement, and adding to 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 acquired assets. Water conservation and initiatives taken by large water operators in educating their consumers on efficient usage and appliances to detect leakage should help to prevent wastage.
This Zacks Utility Water Supply industry is a 12-stock group within the broader Zacks Utilities sector. The industry currently carries a Zacks Industry Rank #195, which places it in the bottom 23% 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 not optimistic about this group's earnings growth potential. The Water Utility industry's 2022 earnings estimates have decreased nearly 3.1% since April 2021 to $2.18.
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.
The Zacks Utility Water Supply industry has lagged its own sector and the Zacks S&P 500 composite over the past 12 months. The industry has lost 3.4% compared with its sector's rally of 0.6% in the past 12 months. The S&P 500 has declined 1.2% in the said time frame.
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 20.53X compared with the S&P 500's 13.59X. It is trading above the sector's trailing 12-month EV/EBITDA of 17.8X.
Over the past five years, the industry has traded as high as 24.11X, as low as 10.22X and at the median of 12.78X.
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 has plans to invest $13-$14 billion in the 2022-2026 time period and $28-$32 billion in 2022-2031. AWK is also very active in making acquisitions and benefits by expanding operations in the United States through the inorganic route.
Over the past 60 days, the Zacks Consensus Estimate for 2022 and 2023 earnings has moved up by 0.4% and 0.2%, respectively. The long-term (three to five years) earnings growth of the company is currently pegged at 8.08%. 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.
Essential Utilities, Inc : Bryn Mawr, PA-based Essential Utilities, along with its subsidiaries, provides water, wastewater and natural gas services to its customers. WTRG has a well-spread water infrastructure to deliver quality services to its expanding customer base. Essential Utilities has diversified operations through the acquisition of Peoples Gas, a natural gas distribution utility. WTRG's long-term plan is to invest $3 billion through 2023 to rehabilitate and strengthen water and natural gas pipeline systems.
Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved up by 0.6%. The long-term (three to five years) earnings growth of the company is currently pegged at 6.08%. Essential Utilities currently has a Zacks Rank #2 (Buy).
Middlesex Water Company: Iselin, NJ-based Middlesex Water, along with its subsidiaries, provides water and wastewater services to its customers. Middlesex Water, through steady capital investment, customer additions and organic growth, is expanding its operation. Middlesex Water has plans to invest $229 million during the 2022-2024 period to strengthen its water and wastewater infrastructure to provide services to customers in a safe, reliable and efficient manner.
Over the past 60 days, the Zacks Consensus Estimate for 2022 and 2023 earnings has moved up by 7.7% and 6.3%, respectively. The stock has gained 5.8% in the past 12 months. Middlesex Water currently has a Zacks Rank #2 (Buy).
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
See Stocks Free >>
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
Middlesex Water Company (MSEX) : Free Stock Analysis Report
Essential Utilities Inc. (WTRG) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
