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Essential Utilities (WTRG) to Gain From Buyouts, Demand Changes a Woe

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Essential Utilities WTRG is benefiting from systematic acquisitions, partnerships with developers and organic growth of its water and natural gas operations through systematic investments. However, weather fluctuation and resultant drop in demand remains a threat.

This Zacks Rank#3 (Hold) stock delivered a four-quarter earnings surprise of 4.6%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Its long-term (three to five years) earnings growth is currently pegged at 6.22%. Moreover, its current dividend yield of 2.1% is better than its industry average of 1.6%.

Tailwinds

In 2021, Essential Utilities targets to makes an investment of $450 million to strengthen its natural gas infrastructure. Further, it aims to invest $550 million in water business. The company plans to invest $3 billion in the time period 2021-2023 to fortify operations and efficiently serve the expanding customer base and strengthen the water and natural gas pipeline system. Water utility, American Water Works AWK plans to invest $10.4 billion in the 2021-2025 time period and $22-$25 billion in the next decade to improve operational efficiency. Another water utility, California Water Service CWT, plans to invest in the range of $270-$300 million in 2021 to strengthen its water and wastewater infrastructure.

The company recognizes the importance of consolidation in the water utility space and is resolutely working its way toward achieving it. It is actively exploring opportunities to expand utility operations through the acquisition of municipal assets. The company closed four municipal acquisitions during 2020 that is expected to expand its product portfolio and customer base, thereby generating a strong cash flow. The company expects the water and wastewater customer base to increase 2-3% year over year in 2021 through acquisitions. Similarly, another water utility Consolidated Water CWCO is pursuing joint ventures, strategic alliances and acquisitions to expand its operation. It has acquired Aerex Industries, Inc to support its manufacturing segment.

Headwinds

Essential Utilities operations could be negatively impacted by the fluctuating demand of water services related to weather, which might affect the profitability of the company.

The company is to subject to certain federal and state environmental laws, as well as regulations. With environmental regulations getting stricter day by day, compliance of the stricter regulation could result in significantly higher operating costs for the company.

Price Performance

In the past 12 months, shares of this utility have gained 12.2%, underperforming the industry’s 14.7% growth.

Zacks Investment Research
Zacks Investment Research

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Zacks Investment Research