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American Water Sustains Growth, Buys Sadorus Water System

Zacks Equity Research

Illinois American Water, a subsidiary of water utility American Water Works Company Inc. AWK, has completed the acquisition of the Village of Sadorus water system for $240,000. The Village of Sadorus’ Board voted in favor of the sale in April 2016 with the Illinois Commerce Commission (ICC) approving it.

This acquisition will add 185 customers to the existing base in the Champaign County District and the company will serve a population of nearly 400 residents.

Illinois American Water will invest nearly $1.2 million to upgrade the Village of Sadorus water system. The investment will be directed to improve the water quality and fire protection in Sadorus.

Recent Acquisition

During Dec 2016, American Water Works’ subsidiary, Pennsylvania American Water, completed acquisition of wastewater system from the Scranton Sewer Authority (SSA) for $195 million. The purchase will add nearly 31,000 customers to American Water Work’s existing 15 million customer base, across 47 states in the U.S. and in Ontario, Canada. (read more:American Water Unit Acquires Scranton Wastewater System)

Expansion via Acquisition

Consolidation is the need of the hour in the fragmented U.S. water utility space. The old water utility infrastructure needs ample investments, which are easier for bigger players to make. Consolidation would therefore drive the necessary infrastructure overhauls for the industry at large.

American Water Works is quite active in the acquisition front and added 42,000 new customers through acquisitions in 2016. The company is expected to add another 40,000 in 2017 through the pending acquisition.

Another water utility, Aqua America Inc. WTR, is equally active in expanding its market reach through acquisitions. In 2016, the company added 14,399 customers to its existing base through organic growth and strategic accretions. In 2017, the company expects to expand its customer base by 1.5% to 2% from 2016 levels.

Investment to Upgrade

Overall water infrastructure in the U.S. is quite old and near the end of its life. Some of the water mains are about a century old and require immediate replacement. Hence, operators in this fragmented water utility space are investing on a regular basis to upgrade and improve the quality of their existing infrastructure.

For 2017, American Water Works’ capital investment budget is $1.5 billion. The company aims to invest $6.7–$7.3 billion from 2017 through 2021. Another water utility, Connecticut Water Service Inc. CTWS, aims to invest more than $150 million in the 2017–2019 time frame to strengthen its existing water infrastructure.

Price Movement

In the last three months, American Water Works’ shares returned 6.4%, outperforming the Zacks categorized Utility-Water Supply industry’s increase of 5.7%.

The utility is well poised to benefit from regulated investments to strengthen existing infrastructure as well as strategic acquisition, which, in turn, is expanding customer base and providing a boost to the top line.

Zacks Rank

American Water Works currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Artesian Resources Corp. ARTNA, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Artesian Resources Corporation’s 2017 Zacks Consensus Estimate moved up by 6.4% to $1.49 per share in the last 60 days.

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