As the U.S. water infrastructure is aging, massive funding is needed to upgrade the quality of the same. The U.S. Environmental Protection Agency estimates that more than $743 billion is needed to carry out U.S. water and wastewater infrastructure improvements. Per an American Water Works Association ("AWWA") report, aging of pipelines is causing more than 200,000 water line breaks per year in the United States, resulting in more than 7 billion gallons of water leaking out of aging pipes every year.
Amid such a backdrop, in this article, we run a comparative analysis of two water utilities — American States Water Company AWR and California Water Services Group CWT — to ascertain which one performed better and is a suitable investment option right now.
All regulated water utilities are investing to strengthen operations and recoup the same through rate hikes. Consolidation is the need of the hour in the fragmented U.S. water utility space. There are more than 53,000 water systems in the United States that provide water solutions to customers. It becomes very difficult for small operators or municipalities to make large investments to upgrade and expand water and wastewater infrastructure.
One of the primary reasons for weakening water infrastructure is the gradual decline in Federal government funding for water infrastructure projects. Per the U.S. Water Alliance, the federal government funded 63% of spending in water infrastructure four decades ago, which has come down to 9% now. The funding is not likely to improve drastically in the near term.
However, large water companies are continuously making arrangement for funds to carry out these major overhauls. Consolidation in this highly fragmented water industry would therefore drive the necessary infrastructure overhauls that have become imperative for the industry at large.
Earnings & Surprise Trend
American States Water’s second-quarter 2019 adjusted earnings beat the Zacks Consensus Estimate by 23.08%. The company surpassed the Zacks Consensus Estimate in two out of the trailing four quarters, with the average positive surprise being 5.91%.
California Water Services Group’s second-quarter 2019 operating earnings lagged the Zacks Consensus Estimate by 5.41%. The company’s average negative surprise in the trailing four trailing quarters is 103.46%.
Shares of American States Water and California Water Services Group have gained 51.3% and 36.4%, respectively, compared with the industry’s 42% rally in the past 12 months. The price movement of American States Water is better than that of California Water Services Group.
Price Performance (One year)
Return on Equity (ROE)
ROE is a measure of a company's efficiency in utilizing its shareholders' funds. ROE for American States Water and California Water Services Group stands at 13.04% and 8.21%, respectively. Notably, the industry's ROE currently stands at 9.3%.
American States Water and California Water Services Group’s debt/capital ratio stands at 45.13% and 52.76%, respectively, compared with its industry’s average of 42.72% and the Zacks S&P 500 composite’s 43.3%.
In the past 60 days, the Zacks Consensus Estimate for American States Water’s 2019 earnings has moved up 2.5% to $2.04. Conversely, the Zacks Consensus Estimate for California Water Services Group’s 2019 earnings has been downwardly revised by 5% in the said period to $1.33.
Currently, American States Water has a Zacks Rank #2 (Buy) and California Water Services Group carries a Zack #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Both the water utilities — which are operators in the U.S. water industry — are investing on an ongoing basis to strengthen infrastructure, with an objective of providing better services to customers. In consideration of the above findings, American States Water currently appears to be a better water utility stock than California Water Services Group.
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