On Friday, BofA Securities began coverage on SJW Corp . (NYSE:SJW) with a Neutral rating and set a price target of $65.00. The firm stated that SJW Corp. is currently trading at more than a 15% discount to the average U.S. water group's price-to-earnings ratio. This valuation comes even as the company shows signs of improving earnings quality and has enhanced transparency in its communications with investors.
The coverage starts amidst concerns about potential uncertainties that may affect the company's future. These include the possibility of future acquisitions and issues within the regulatory environment in Connecticut. BofA Securities highlighted that SJW Corp. is considered smaller in scale compared to major U.S. water utilities, with SJW having a market capitalization of less than $2 billion, while larger competitors like American Water (NYSE:AWK) Works Company, Inc. have a market cap of around $30 billion.
The firm's initiation report also noted that SJW Corp. might aim to increase its scale to enhance operational and maintenance efficiencies, which could lead to more consistent earnings. BofA Securities has chosen not to include any potential acquisitions or strategic changes in its earnings forecasts for SJW Corp.
For the coming years, BofA Securities has projected earnings per share (EPS) for SJW Corp. at $2.71 for 2024, $2.92 for 2025, and $3.06 for 2026. These figures are slightly below the consensus estimates of $2.76, $2.96, and $3.10 for the respective years. The firm's stance remains cautious, reflecting the balance between the current discount in SJW Corp.'s trading price and the potential risks that might impact its growth and profitability.
In other recent news, SJW Group has showcased a robust financial performance with a 12% rise in revenue to $176.2 million and a 13% increase in net income to $20.7 million in the second quarter of 2024. The company also confirmed a capital investment outlook of $1.6 billion over five years, reflecting its commitment to infrastructure development. In regulatory developments, SJW Group has reached a settlement agreement for the 2025-2027 general rate case in California and secured approval for an annualized revenue increase of $6.5 million in Connecticut.
Further, the company has successfully extended its credit agreement to August 2, 2029, ensuring long-term operational stability. In a recent development, San Jose Water, a subsidiary of SJW Group, agreed to a proposed $450 million investment in drinking water infrastructure, pending approval by the California Public Utilities Commission. This agreement aims to enhance the local water system's daily operations, fire protection, economic growth, and environmental conservation.
Lastly, SJW Group has secured $15.3 million in arrearage relief for customers in California and expanded the Water Rate Assistance Program in Connecticut.
InvestingPro Insights
As BofA Securities initiates coverage on SJW Corp. with a neutral stance, highlighting the company's valuation and potential for earnings improvement, it's valuable to consider additional insights from InvestingPro. With a market capitalization of $1.96 billion, SJW operates with a significant debt burden, which is an important consideration for investors. Despite this, SJW has a strong track record of raising its dividend, having done so for 31 consecutive years, and maintaining dividend payments for 53 consecutive years, signaling a commitment to shareholder returns.
InvestingPro data shows that SJW Corp. has a Price/Earnings (P/E) ratio of 21.92, which is in line with BofA's assessment of the company's discount compared to its peers. The company's revenue has grown by 9.38% over the last twelve months as of Q2 2024, and its gross profit margin stands at a healthy 57.61%. Analysts predict the company will be profitable this year, with a strong return over the last three months, as evidenced by a 15.3% price total return.
For investors seeking more comprehensive analysis, InvestingPro provides additional tips and metrics, including the company's performance relative to short-term obligations and liquid assets, as well as further profitability indicators. There are six more InvestingPro Tips available for SJW Corp., which can be accessed for deeper investment research and decision-making.
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