The Rest Of The Water Utility Story

By James Brumley | August 06, 2010 AAA

They're on the low end of the "interesting" scale, to be sure. But that doesn't mean these stocks can't put up some exciting numbers or generate some exciting returns. I'm talking about water utility stocks, and even though you'll rarely find them on the front page of your financial periodical of choice, it's something that probably should be found in most portfolios - selectively.

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In any case, it's been a busy few days for the industry, as most of the majors have posted earnings over the last week and a half. While we saw a few more earnings shortfalls than we'd like, when you dig deeper into the numbers, you find some surprising YOY (year-over-year) increases and some compelling outlooks.

Water Utilities' Earnings Report Card

Earnings success can be difficult to identify. By most regards, any number bigger than the year-ago value should be a positive. Yet analyst estimates (and who's to say the analysts always know what they're doing?) are the prevailing yardstick for some reason. Maybe they should be, or maybe not. It's just something to think about as you work through these second quarter earnings results.

In the interest of brevity, I'll just gather all the recent EPS data for the water industry's biggest names and compare those figures to last year's numbers, and to this year's estimates. The table tells the tale.

Last Qtr EPS Estimated EPS Year-Ago EPS
Aqua America (NYSE:WTR) 22 cents 21 cents 19 cents
American Water Works (NYSE:AWK) 42 cents 36 cents 32 cents
American States Water (NYSE:AWR) 47 cents 57 cents 64 cents
California Water Service (NYSE:CWT) 50 cents 59 cents 58 cents
SJW Corp. (NYSE:SJW) 24 cents 27 cents 23 cents
Middlesex Water (Nasdaq:MSEX) 31 cents NA 21 cents

So, is this good or bad? Strictly from an earnings perspective, I'd have to give the group a C+ or a B- ... with a disproportionate number of students at each far, far end of the bell curve. Life isn't just about numbers, though. It's the rest of what these companies said about current and future business that really rounds out the story.

Looking Ahead/Food For Thought

It was clearly a great quarter. All but two of the six companies mentioned either topped estimates or topped last year's comparable number. Some did both. And if you dig deeper into American States Water's numbers, you'll see that the 9 cent EPS difference between now and then was due to factors pretty much out of its control (taxes, legal settlements, etc.). Well, that and one more reason that is considered below. So, really only one of the six companies stumbled.

The question is, can investors expect this kind of growth or these kinds of "beats" going forward?

Yes.

One of the great - yet frustrating - nuances of the water utilities business is that your rates are set by your local government; any rate hike is ultimately approved by local officials. And, as is the case with most government procedures, such agreements are requested and discussed publicly, and they take time to win final approval.

Take Middlesex, for instance. Revenue for the quarter rose from $23.1 million to $26.5 million on higher demand, despite a rate hike that went into effect in March. American Water sang the same song, improving regulated revenue by 9.5% and non-regulated revenue by 17.2%. Revenues are typically subject to volatility depending on the prevailing rates. Other water companies posted similar details to Q2 numbers.

In The Meantime

More importantly, though, is that many of these companies have rate increases in the cue, and some have even filed for rate hikes in the meantime.

Take American Water, for example. The company was approved for a rate increase during Q2 that will annually add $118.6 million to the revenue line, while during the quarter it applied for another $168 million worth of annual rate increases.

Aqua America is another example. The company has already been approved for $43.7 million more in annual revenue, while the company still has another $13.7 million on the table. Yet Aqua America plans to ask for another $28.5 million (annually) worth of price increases by the end of the year. Considering the company only pulled in revenues of $360 million last year, that extra $85.9 million - an automatic 24% improvement - could come in real handy.

Bottom Line

The future is looking bright for many of these stocks. Though not every single rate increase will be approved, and some will surely be on hold longer than these companies would like, you can take these growth trends at face value. (Gas, electric and water companies' non-cyclical nature can power strong gains in any portfolio. To learn more, see Utility Funds: A Bright Choice In Bear And Bull Markets.)

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