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4 Water Utility Stocks to Watch in a Prospering Industry

·8 min read

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, which 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, 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 are Essential Utilities WTRG, SJW Group SJW and The York Water Company YORW.

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 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.

3 Trends Pivotal for Shaping the Water Supply Industry's Future

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 the overall U.S. water and wastewater infrastructure. Per 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 the 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.

Efficient Use is Saving Precious Water: An interesting trend in the water industry is reducing per-capita water usage. The reasons behind the drop are the use of water-efficient techniques, raising awareness among customers by the water utilities, the use of advanced water-efficient appliances and actions taken to fix pipeline leaks. 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.

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 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. The 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 use and appliances to detect leakage should help to prevent wastage.

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 #84, which places it in the top 33% 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 strong 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 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 Water Utility industry’s 2022 earnings estimates have improved 0.5% since June 2022 to $2.15.

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 but Outperforms S&P 500

The Zacks Utility Water Supply industry has lagged its sector but outperformed the Zacks S&P 500 composite over the past 12 months. The industry has lost 10.6% compared with the Zacks S&P 500 Composite’s decline of 14.7%. The Utility sector has rallied 3.6% in the said 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 20.05X compared with the S&P 500’s 12.09X. It is trading above the sector’s trailing 12-month EV/EBITDA of 18.62X.

Over the past five years, the industry has traded as high as 23.26X, as low as 9.96X and at the median of 12.63X.

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

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 $13-$14 billion in the 2022-2026 period and $28-$32 billion in 2022-2031. AWK is also active in making acquisitions and benefits by expanding operations in the United States through the inorganic route.

Over the past 30 days, the Zacks Consensus Estimate for 2022 earnings has been unchanged. The long-term (three to five years) earnings growth of the company is currently pegged at 8.08%. The company reported an average surprise of 5.19% in the last four quarters. 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: The Bryn Mawr, PA-based company, along with its subsidiaries, provides water, wastewater and natural gas services to 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 30 days, the Zacks Consensus Estimate for 2022 earnings has been unchanged. The long-term (three to five years) earnings growth of the company is currently pegged at 6.14%. The current dividend yield of the company is 2.34%. Essential Utilities currently has a Zacks Rank #3.

Price and Consensus: WTRG

SJW Group: The San Jose, CA-based company, along with its subsidiaries, provides water services to customers in the United States. SJW Group makes consistent investments to upgrade and maintain its existing infrastructure and plans to invest $1.3 billion to upgrade its infrastructure, subject to regulatory approvals. The company makes strategic acquisitions to further expand its operation across the United States.

Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved up by 0.4%. SJW Group’s current dividend yield is 2.25%. SJW currently has a Zacks Rank #2 (Buy).

Price and Consensus: SJW

The York Water Company: The York, PA-based company provides drinking water and wastewater services. The company is investing systematically to upgrade infrastructure and provide quality services to its customers.

Over the past 60 days, the Zacks Consensus Estimate for 2022 and 2023 earnings has moved up 3% and 0.7%, respectively. The company reported an earnings surprise of 2.23% in the last four quarters. The current dividend yield of the company is 1.79%. York Water currently has a Zacks Rank #2.

Price and Consensus: YORW






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American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
 
The York Water Company (YORW) : Free Stock Analysis Report
 
SJW Group (SJW) : Free Stock Analysis Report
 
Essential Utilities Inc. (WTRG) : Free Stock Analysis Report
 
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