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4 Water Utility Stocks to Watch in a Promising Industry

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 utilities worth retaining in one’s portfolio are Consolidated Water Co. Ltd. CWCO, Global Water Resources Inc. GWRS and SJW Group SJW.


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. 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. High per capita usage and increasing population are resulting in higher demand for potable water and water utilities, apart from necessitating proper maintenance and upgrade of aging 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

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 American Society of Civil Engineers (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 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 of appliances and detecting leakage should help to prevent wastage.

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 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 investment for maintenance and upgrade. 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.

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Efficient Use is Saving Precious Water: An interesting trend in the water industry is the reduction in per-capita water usage. The reasons for the drop are the use of water-efficient techniques, heightened awareness among customers courtesy of the water utilities, the use of advanced water-efficient appliances and actions taken to fix pipeline leaks. Efficiency in water usage in irrigation for farming and lower water usage in thermoelectric power due to better cooling methods reduce water usage. 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.

Zacks Industry Rank Indicates Bright 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 #87, which places it in the top 35% 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 outperforms 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 potential.

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 Outperforms Sector, Lags S&P 500

The Zacks Utility Water Supply industry has outperformed its sector but lagged the Zacks S&P 500 composite over the past 12 months. The industry has lost 0.9% compared with the Utility sector’s decline of 12.3%, while the Zacks S&P 500 composite has gained 5.8% in the same 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 9.4X compared with the S&P 500’s 12.69X. It is trading above the sector’s trailing 12-month EV/EBITDA of 19.99X.

Over the past five years, the industry has traded as high as 23.26X, as low as 9.16X and at the median of 14.45X.

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

Global Water Resources Inc: This Phoenix, AZ-based company provides drinking water and wastewater services. Global Water Resources is making significant progress in expanding through organic means, acquisitions, utility rate increases and spreading operations in new service areas. The improving economic conditions in Arizona also create fresh demand.

Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved up 24% to 31 cents per share. The company delivered an earnings surprise of 50.83% in the last four quarters. The current dividend yield of the company is 2.49%. Global Water Resources currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: GWRS

 

SJW Group : This 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 has a five-year plan to invest $1.3 billion in water and wastewater infrastructure and provide a safe and reliable service to customers.

Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved up by 0.8% to $2.47 per share. The current dividend yield of the company is 2.05%. SJW currently has a Zacks Rank #2.

Price and Consensus: SJW

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 $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. Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has been unchanged. The long-term (three to five years) earnings growth of the company is currently pegged at 8.23%. The current dividend yield of the company is 2%. The company delivered an average surprise of 5.04% in the last four quarters. American Water currently has a Zacks Rank #3 (Hold).

Price and Consensus: AWK

Consolidated Water Co. Ltd: This Grand Cayman, Cayman Islands-based company, along with its subsidiaries, is involved in the development and operation of seawater desalination plants and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent. Consolidated Water operates 11 water production plants with a capacity of 25.5 million gallons per day in four countries and is looking for opportunities in new markets to further expand drinking water and wastewater services. In the past six months, the stock has returned 33.9%. Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved up by 3.3%. The long-term earnings growth of the company is currently pegged at 8% The current dividend yield of the company is 1.77%. Consolidated Water currently has a Zacks Rank #3.

Price and Consensus: CWCO


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

Consolidated Water Co. Ltd. (CWCO) : Free Stock Analysis Report

SJW Group (SJW) : Free Stock Analysis Report

Global Water Resources, Inc. (GWRS) : Free Stock Analysis Report

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