American Water Works Company AWK recently announced that its subsidiary, Pennsylvania American Water, has acquired the wastewater system assets of Upper Pottsgrove Township, Montgomery County PA. The acquisition will add 1,550 wastewater customers to the company’s existing 2.4 million customers. Pennsylvania American Water will pay $13.75 million for the acquisition of the wastewater assets.
The aging of crucial water and wastewater infrastructure is a concern for the water industry of the United States. The highly fragmented industry, with its small number of operators and limited financial strength, leads to a delay in investment in essential repair and upgrade. The acquisition of smaller units by larger ones ensures the necessary investment in aging infrastructure. Pennsylvania American Water has plans to invest $4 million in Upper Pottsgrove Township wastewater system’s improvements in the next five years.
Pennsylvania American Water makes systematic investments to upgrade its infrastructure and makes strategic acquisitions to expand operations along with organic initiatives. In May 2022, Pennsylvania American Water completed the acquisition of City of York’s wastewater system assets, which added nearly 45,000 customer connections.
Fragmented Water Industry Needs Consolidation
Per the Environmental Protection Agency, 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 findings of the American Society of Civil Engineers, water main breaks occur every two minutes in the United States due to the aging of the existing water infrastructure. The breaks in the pipeline result in the wastage of 6 billion gallons of potable water each day and add to the loss of water utility operators.
The acquisition of small units by larger utilities ensures necessary investments for the upgrade of infrastructure and the continuation of high-quality services for customers. American Water Works continues to widen its market footprint through strategic acquisitions.
Other companies in the water industry expanding their operations through acquisitions are Essential Utilities WTRG and California Water Service Group CWT.
During the six-year period ended Dec 31, 2021, Essential Utilities expanded utility operations by completing many water and wastewater acquisitions, which, in turn, added 94,000 new customers. In the first quarter of 2022, the company completed one acquisition, which added 11,000 customers.
Essential Utilities’ long-term earnings growth is currently pegged at 6.1%. The Zacks Consensus Estimate for WTRG’s 2022 earnings implies year-over-year growth of 6.6%.
California Water Service recently received approval to acquire the water system assets of Skylonda Mutual Water Company. The acquisition is scheduled to close later this year, subject to customary closing conditions. In April 2022, another unit of California Water Service, New Mexico Water Service, closed the acquisition of Morningstar Water System, which added 2,000 water connections.
The Zacks Consensus Estimate for California Water Service’s 2023 earnings implies year-over-year growth of 9.3%.
Shares of AWK have risen 13.5% in the past two years compared with the industry’s 5.6% rally.
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Zacks Rank & Key Pick
American Water currently has a Zacks Rank #2 (Buy). Another top-ranked stock in the same space is Global Water Resources Inc. GWRS, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Global Water delivered an average surprise of 154.2% in the last four quarters. The Zacks Consensus Estimate for Global Water Resources’ 2022 earnings has moved up by 25% in the past 60 days to 20 cents per share. The Zacks Consensus Estimate for GWRS’ 2023 earnings has moved up by 10% in the past 60 days to 22 cents per share.
Global Water Resources’ long-term (three to five years) earnings growth is projected at 15%. The current dividend yield of the company is 2.18%, better than Zacks S&P 500 Composite’s average yield of 1.74%.
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