The outbreak of the novel coronavirus has again highlighted the importance of potable water and wastewater services. It is all the more essential to have 24x7 supply of clean water and reliable sewer services amid the pandemic.
Water and wastewater service providers across the United States have gone all out to ensure round-the-clock services. Water utilities continue with their upgrade and maintenance projects amid the pandemic to minimize disruption in operation. American Water Works Company (AWK) with its widespread operation and systematic capital expenditure to further strengthen its existing assets offer an excellent opportunity to stay invested in the water utility space. Other utilities that are worth holding in one’s portfolio include Essential Utilities (WTRG), California Water Service Group (CWT) and Primo Water Corporation (PRMW).
About the Industry
The Zacks Utility - Water Supply industry includes companies that are involved in providing drinking water and wastewater services to industrial, commercial and residential customer classes. The water utilities also provide services to numerous military bases across the United States.
Water utility operators own more than one million miles of pipelines that are buried under soil with old pipelines being replaced and new pipelines added each day to expand operations. Moreover, they own water treatment plants and desalination plants to supply potable water 24X7 across customer classes. The U.S. Geological Survey compiles a total water usage survey of the United States every five years and per the last survey water usage in the United States was 322 billion gallons per day in 2015.
Let’s take a look at the three major industry themes:
Water Essential to Fight Pandemic: Water continues to play a critical role in preventing the spread of COVID-19. Washing hands properly with soap at regular interval is the primary way of not getting infected and breaking the chain of the infection. Water utilities are also extending 24x7 water and wastewaters services to their customers across the United States, ignoring non-payment of water and wastewater service dues. Industry participants are restoring services previously disconnected and waiving penalties for nonpayment of utility dues. Amid the unprecedented economic crisis, a few water utilities are continuing with planned capital projects to efficiently serve their current and future customers. Per the United States Environmental Protection Agency (“EPA”), COVID-19 has not been detected in drinking-water supplies and based on current finding, the risk to water supplies is low. Hence EPA advises Americans to continue using and drinking water from their taps as usual.
Aging Water and Wastewater Infrastructure: 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), nearly 300,000 line breaks occur every year in the United States due to the aging of existing water infrastructure. The breaks in the pipeline result in wastage of millions of gallons of potable water each day and adds to the loss of water utility operators. Per the Water and Wastewater Equipment Manufacturers Association, an estimated $750 billion investment is necessary to maintain and expand the drinking water and wastewater service to meet demand over the next 20 years. So huge effort is needed from private operators and funding is required from government agencies to upgrade and maintain aging water and wastewater facilities.
Consolidation in Fragmented Water Utility Space: The United States water utility industry is very fragmented and hence consolidation is the need of the hour to upgrade the existing aging assets to provide quality services. Per an American Water report, at present more than 53,000 water systems in the United States are providing water solutions to customers, which creates operational challenges in meeting requirement for replacement, and adding to aging water and wastewater infrastructure. At present, only 7% of the country’s systems serve a population of more than 10,000 and a mere 1% of the systems serve a population of more than 100,000. Acquisitions of small water utilities by bigger companies ensure extension of high-quality services to customers and regular investment required for upgrade of assets of small service providers. Water conservation and initiatives taken by large water operators in educating their consumers on efficient usage and appliances to detect leakage will help to prevent wastage.
Zacks Industry Rank Indicates Strong Prospects
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 #117, which places it in the top 46% 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 solid 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 top 50% of the Zacks-ranked industries is a result of 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. Water Utility industry’s 2020 earnings estimates moved up 4.4% since April 2020 to $1.91.
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 S&P 500 But Outperforms Sector
The Zacks Utility Water Supply industry has outperformed its own sector but lagged the Zacks S&P 500 composite over the past 12 months. The industry has gained 6.3% against its sector’s decline of 1.4% in the past 12 months. The S&P 500 has risen 20.4% in the said time frame.
One Year Price Performance
Industry’s Current Valuation
On the basis of 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 15.42X compared with the S&P 500’s 16.39X. It is trading below the sector’s trailing 12-month EV/EBITDA of 17.99X.
Over the past five years, the industry has traded as high as 15.79X, as low as 10.00X and at the median of 11.96X.
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 On
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 $8.8-$9.4 billion in the 2020-2024 time period and $20-$22 billion in the next decade to strengthen and expand its infrastructure.
The Zacks Consensus Estimate for American Water’s 2021 earnings and revenues suggests year-over-year rise of 9.6% and 4.3%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 0.2%. The stock has gained 25.5% over the past 12 months. 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.
Price and Consensus: AWK
Essential Utilities, Inc: Bryn Mawr, PA based Essential Utilities along with its subsidiaries provides water, wastewater and natural gas services to customers. The company has a well spread out water infrastructure to provide quality services to its expanding customer base. It has diversified operation through the acquisition of Peoples Gas, a natural gas distribution utility. Its long-term plan is to invest $2.8 billion in the 2020-2022 time period to rehabilitate and strengthen water and natural gas pipeline systems.
The Zacks Consensus Estimate for Essential Utilities’ 2021 earnings and revenues suggests a year-over-year rise of 5.6% and 34.2%, respectively. Over the past 30 days, the Zacks Consensus Estimate for 2021 has remained unchanged. The stock has gained 8.7% over the past 12 months. Essential Utilities currently has a Zacks Rank #3.
Price and Consensus: WTRG
California Water Service Group: San Jose, CA based California Water Service provides water and wastewater services in a few states. Recently, the company completed the Palos Verdes Peninsula Water Reliability Project that will support the existing 60-year-old drinking water pipeline and provide assistance to the system during natural disasters. The company aims to invest nearly $809 million to $828 million between 2019 and 2021 to strengthen its infrastructure.
Over the past 30 days, the Zacks Consensus Estimate for 2021 has remained unchanged. The stock has declined 4% over the past 12 months. California Water Service currently sports a Zacks Rank #1.
Price and Consensus:CWT
Primo Water Corporation: Tampa, FL- based Primo Water provides home and office bottled water delivery and water filtration services in North America and Europe. The company is focused on its cost containment initiatives to enhance margins and working to expand its operation among the European residential Base.
The Zacks Consensus Estimate for Primo Water’s 2021 earnings and revenues suggests a year-over-year rise of 16.8% and 7.4%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 17.3%. The stock has gained 14.3% over the past 12 months. Primo Water currently has a Zacks Rank #2 (Buy).
Price and Consensus: PRMW
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Today, See These 5 Potential Home Runs >>
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
Essential Utilities Inc. (WTRG) : Free Stock Analysis Report
Primo Water Corporation (PRMW) : Free Stock Analysis Report
California Water Service Group (CWT) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
To read this article on Zacks.com click here.