Steady customer usage that is not very economically sensitive.
Monopoly status in most service areas.
Reasonable returns on total capital.
Limited growth potential.
Heavy projected infrastructure spending needs.
Potential legislative push-back on future rate increases as prices escalate.
Relatively heavy debt loads with refinancing risks if credit stays tight.
Here are the numbers from some of the major players in the Water industry:
|Company||Price||2010 P/E||2011 P/E||Yield||5-yr EPS growth/yr.||52-wk range|
|American Water-AWK||21.09||15.1x||13.7x||3.98%||NMF*|| 18.70 – |
|Amer. States Water-AWR||34.40||16.9x||15.8x||3.02%||8.5%||31.20 – 39.61|
|Aqua America- WTR||19.24||21.9x||20.0x||3.01%||5.5%||15.39 – 19.56|
|Calif. Water- CWT||35.80||17.9x||15.8x||3.32%||6.5%||33.81 – 40.65|
|Conn. Water Serv.-CTWS||21.97||20.3x||19.3x||4.14%||-0.5%||20.00 – 26.44|
|Middlesex Water-MSEX||16.35||18.0x||17.8x||4.40%||3.5%||14.15 – 18.70|
|York Water- YORW||14.12||21.1x||19.1x||3.61%||5.5%||12.83 – 17.95|
Historical growth in EPS has been quite moderate while the P/Es are not cheap. None of the stocks listed have shown gains from their price points from years ago. In my view the projected shortages and rate increases will ultimately happen but only after these companies are forced to absorb enormous costs to maintain and upgrade antiquated pipelines and treatment centers.
I also see political risk as low income customers cry poverty in response to increased water bills. Just as President Obama has lashed out at drug companies for gouging patients I think local legislators will be attacking these profit making providers of essential services. Margins are likely to suffer rather than expand.
I see much better opportunities elsewhere and would avoid this group unless share prices go substantially lower on a valuation basis.
Dr. Paul Price
About the author:http://www.RealMoneyPro.com