4 Stocks to Watch From the Promising Water Supply 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 California Water Service Group CWT, SJW Group SJW and Consolidated Water Co. Ltd. CWCO.
About the Industry
The Zacks Utility - Water Supply industry includes companies providing drinking water and wastewater services to industrial, commercial, 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 use by individuals and other industries will ensure that previous water is not wasted. A large nation like the United States already has a widespread water infrastructure in place but proper maintenance and upgrade of aging infrastructure becomes crucial for the supply of potable water to millions of consumers.
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 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, 6 billion gallons of treated water is lost every day 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 in educating their consumers on the 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 massive investment requirement also creates an opportunity for growth for the 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 to upgrading water infrastructure serving disadvantaged communities. ASCE gives a C- rating to the U.S. drinking water infrastructure and D+ to the U.S. wastewater infrastructure.
Efficient Use Will Save Precious Water: Usage of water-efficient techniques, the use of advanced water-efficient appliances and timely actions taken to fix pipeline leaks will save precious water. If we use water more efficiently, it will not only lower wastage but reduce monthly utility bills. New methods used to cool turbines of power plants and efficiency in water usage in irrigation for farming reduce water usage. Lower use per person allows water utilities to meet the needs 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 Rosy 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 #34, which places it in the top 14% 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. The industry’s earnings estimates have been revised 0.9% upward by analysts for the current year since Jun 1, 2023.
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 Lags Sector & S&P 500
The Zacks Utility Water Supply industry has lagged its sector and the Zacks S&P 500 composite over the past 12 months. The industry has lost 15.2%, wider than the Utility sector’s decline of 13%, while the Zacks S&P 500 composite has gained 6.8% 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 9.53X compared with the S&P 500’s 12.28X and the sector’s trailing 12-month EV/EBITDA of 16.74X.
Over the past five years, the water supply industry has traded as high as 23.26X, as low as 9.5X and at the median of 14.15X.
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 a Close Watch
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. Consolidated Water operates 11 water production plants with a capacity of 25.5 million gallons per day in four countries. In the past six months, the stock has returned 74% against its industry’s decline of 46.9%. Over the past 90 days, the Zacks Consensus Estimate for 2023 earnings has moved up by nearly 49%. The long-term (three to five years) earnings growth rate for the company is currently pegged at 8%. The current dividend yield of the company is 1.31%. Consolidated Water currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CWCO
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 has decided to invest $255 million in water and wastewater infrastructure and provide a safe and reliable service to its customers. Over the past 90 days, the Zacks Consensus Estimate for 2023 earnings has remained at $2.47 per share. SJW Group’s current dividend yield is 2.59%. SJW currently has a Zacks Rank #2.
Price and Consensus: SJW
California Water Service Group: The San Jose, CA-based company, along with its subsidiaries, provides water utility and other related services to customers in the United States. The company continues to expand operations through acquisitions and plans to invest $725 million in 2023-2024 time period to further strengthen its infrastructure, repair and upgrade aging assets. Over the past 90 days, the Zacks Consensus Estimate for 2023 earnings has increased by 3.2% to $1.91. The current dividend yield of the company is 2.15%. The company delivered a positive surprise of 11.11% in the last quarter. California Water Service currently has a Zacks Rank #2.
Price and Consensus: CWT
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 $2.9 billion in 2023 to strengthen and expand its existing infrastructure. Over the past 90 days, the Zacks Consensus Estimate for 2023 earnings has moved up by 0.4%. The long-term earnings growth of the company is currently pegged at 8.18%. The current dividend yield of the company is 2.43%. The company delivered an average surprise of 7.07% in the last four quarters. American Water currently has a Zacks Rank #3 (Hold).
Price and Consensus: AWK
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American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
California Water Service Group (CWT) : Free Stock Analysis Report
Consolidated Water Co. Ltd. (CWCO) : Free Stock Analysis Report
SJW Group (SJW) : Free Stock Analysis Report
