Water Supply Industry Outlook Bright Despite Coronavirus Crisis

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 millions of miles of pipelines that are buried under soil. Moreover, they own water treatment plants and desalination plants to supply 24X7 potable water across customer classes. On Mar 22, 2020, World Water Day was celebrated and the theme for this year was Water and Climate Change. The primary objective was to utilize water more efficiently.

Let’s take a look at the three major industry themes:

• The fear of the novel coronavirus (COVID-19) is gripping the whole world and adversely impacting the global economy. Water will play a very critical role globally in prevention of spread of novel coronavirus. Washing your hands properly with soap at regular interval is the primary way of not getting infected and also breaking the chain of the spread of this contagious virus. The spread of COVID-19 has also resulting in financial hardship of consumers resulting in non-payment of water and wastewater service dues. Amid such a situation, more than 90 cities, a few states in the United States and a few private water companies have already announced plans to continue providing water and wastewater services even in the event of non-payment of dues in this crisis period.
  

• This unprecedented situation created by COVID-19 has once again pointed out the significance of potable water and wastewater services in our lives. Per the United States Environmental Protection Agency (“EPA”) COVID-19 virus has not been detected in drinking-water supplies and based on current finding, the risk to water supplies is low, EPA advises that Americans can continue to use and drink water from their tap as usual. However, per an American Water Works Association report, more than 200,000 water lines break per year in the United States, resulting in 7 billion gallons of water leaking out of aging pipes. It is quite evident that government funding is not expected to increase dramatically in the near term, so regulated companies in the water space will have to take an initiative to upgrade water and wastewater infrastructure to control and check wastage. To boost the economy, the Federal Reserve has lowered interest rate to near zero level. This will help water companies to source funds at a cheaper rate and continue with long-term capital projects to provide quality water and wastewater services to different categories of customers.
  

• Consolidation is the need of the hour in the very fragmented water utility industry. At present more than 53,000 water systems in the United States are providing water solutions to customers. The highly fragmented water industry creates operational challenges in meeting or increasing requirement for replacement and addition 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. Acquisition of small water utilities by the bigger companies ensure extension of high-quality services to customers and upgrade of assets of small service providers. Water conservation and initiatives taken by the large water operators in educating their consumers in efficient usage will help comply with the pledge taken on World Water Day i.e. to use and reuse the Earth’s limited water resources is the best possible manner.

Zacks Industry Rank Indicates Strong 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 #59, which places it in the top 23% 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 by 20.5% year over year to $1.82.

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 Outperforms S&P 500 and Sector

The Zacks Utility Water Supply industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months. The industry has declined 9.6% in the past 12 months narrower than the S&P 500’s decline of 18.2% and its sector’s decline of 33.3%.


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 12.64X compared with the S&P 500’s 8.52X. It is trading below the sector’s trailing 12-month EV/EBITDA of 15.08X.

Over the past five years, the industry has traded as high as 17.32X, low of 10.16X and at the median of 11.8X.

EV/EBITDA


Water Supply Industry vs S&P 500 ( Past 5 yrs)

Water Supply Industry vs Utility Sector ( Past 5 yrs)

Summing Up

In this COVID-19-induced crisis period, demand for potable water will increase globally and also in the United States. With demand for potable water growing in the United States, an increasing number of desalination plants have been pressed into service. Per an International Desalination Association report, more than 2,000 desalination facilities are operational in the United States and the number is gradually rising.

The huge gap between the actual investment needed and the amount invested in the water industry is alarming. Per EPA estimates, more than $744 billion is needed for U.S. water and wastewater infrastructure improvement. Once this crisis period is behind us, the water utility industry is expected to experience higher volume of capital investment driven by near-zero interest rates.

Below we present four stocks — one sporting a Zacks Rank #1 (Strong Buy), one carrying a Zacks Rank #2 (Buy) and two holding a Zacks Rank #3 (Hold) — that are well positioned to grow in this fragmented water space. You can see the complete list of today’s Zacks #1 Rank stocks here

American States Water Company (AWR), based in San Dimas, CA along with its subsidiaries provides fresh water, wastewater services and electricity to its customers in the United States. The Zacks Consensus Estimate for 2020 EPS has improved 3.2% over the past 60 days. Additionally, its 2020 earnings are expected to improve 10.6% on a year-over-year basis. The stock sports a Zacks Rank #1.

Price & Consensus: AWR

Middlesex Water Company (MSEX) based in Iselin, NJ owns and operates regulated water utility and wastewater systems. The Zacks Consensus Estimate for 2020 EPS has improved 1.5% over the past 60 days. Additionally, its 2020 earnings are expected to improve by 1.5% on a year-over-year basis. The stock has a Zacks Rank #2.

Price & Consensus: MSEX

The York Water Company (YORW), based in York, PA, owns and operates three wastewater collection systems and two wastewater treatment systems; and two reservoirs. The Zacks Consensus Estimate for 2020 EPS has remained unchanged over the past 60 days. Its 2020 earnings are expected to improve 7.2% on a year-over-year basis. The stock carries a Zacks Rank #3.



Price & Consensus: YORW

American Water Works (AWK), based in Camden, NJ, is engaged in providing water services to over 15 million customers in 47 states, the District of Columbia and Ontario, Canada. The long-term earnings growth (three to five years) is 8.1%. The Zacks Consensus Estimate for Q120 EPS has remained unchanged in the past 60 days. However, Q120 earnings are expected to grow 8.2% on a year-over-year basis. The stock carries a Zacks Rank #3.

Price & Consensus: AWK

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