The 'Safety Premium' In Water Investing (AWK, WTR, AWR, CWT)

We have been investigating several of the “safe sectors” for investing to identify which ones may have seen the worst or which ones could continue to have issues regardless of whether or not recent stock market strength holds up or not.  Water is supposed to be one of those immune sectors as people have to drink water every day and just about every aspect of life revolves around water.  So we are starting out with domestic water utilities, because this is the first line of defense in the water sector and the most defensive portion of the water sector.  In theory, these do not require any new community growth or new water-intensive industries for the “defensive” thesis to hold up.  We briefly wanted to review American Water Works Company, Inc. (NYSE: AWK), Aqua America Inc. (NYSE: WTR), American States Water Company (NYSE: AWR), and California Water Service Group (NYSE: CWT).

American Water Works Company, Inc. (NYSE: AWK) was one of 2008’s largest IPO’s, which was actually a Re-IPO after being acquired.  It provides water and wastewater services to residential, commercial, and industrial customers (approximately 15 million) in 32 U.S. states and in Ontario, Canada.  Currently, the company has a $2.9 billion market cap, and its $18.06 stock price gives it an implied forward P/E ratio of almost 14-times expected 2009 earnings.  Its 52-week trading range is $16.22 to $23.65.

Aqua America Inc. (NYSE: WTR) operates regulated utilities which offer community-wide water or wastewater services for residential, commercial, and industrial customers in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, and South Carolina.  The stock has recovered substantially off of  its lows.   It had roughly 3 million customers.  The company  has a $2.6 billion market cap, and with a $19.30 price it trades an an implied forward P/E ratio of 22.7 against 2009 expected earnings.  Its 52-week trading range is $12.20 to $22.00.

American States Water Company (NYSE: AWR) offers water and electric service utility operations for residential and commercial customers.  The difference is that this is not as geographically diverse and it serves many areas which have been hit by the woes of the declining real estate market on top of other issues.   It also distributes electricity in 1 customer service area and 3 water service regions operating within 75 communities in 10 counties in California, as well as provides water service in 21 customer service areas with close to 250,000 water customers and about 23,000 electric customers in California, and it operated 2,724 miles of pipeline of water transmission and distribution systems; it also served 13,488 water-service customers in Arizona and operated 184 miles of pipeline of water transmission and distribution systems.  The $650 million market cap based on a $37.53 stock price gives it an implied forward P/E ratio of 21.4 times expected 2009 earnings. Its 52-week trading range is $27.00 to $42.00.

California Water Service Group (NYSE: CWT) provides water utility and other related services in California, Washington, New Mexico, and Hawaii.  California Water Service Group provides service to approximately 463,000 customers in 83 communities (2007 data).  With a $42.80 stock price, this trades at an implied 20.8-times forward 2009 expected earnings.  Its 52-week trading range is $27.68 to $48.28.

Where this gets interesting is that the bulk of these four trade much closer to their highs than to lows, with the exception of American Water Works.  But it also trades at the largest discount to its forward 2009 earnings estimates.  Part of the problem is that it is a recent IPO after the Germans sold it back to the US public markets.  All of the other stocks in these four are expensive if you consider a mere forward-P/E ratio compared to the market today.  That is because of the defensive nature of the stocks and probably also because of inherent regional monopolies they hold.  Have you ever inquired to see if you could get a new water company of competitive quotes for water service?  You can get a new water provider, if you move to a new market.

Again, this is just four of the companies we cover in the domestic utility side of the water sector equation.  This is also one of the most defensive stock sectors for US investors.  The sector never really gets “cheap” if you are just using P/E ratio comparative analysis.  Traditionally, these might not rally as much as the markets if we go into a bull market mode.  Again, that is “traditionally” and you will be surprised if you look at just how much these have recovered since the lows of October and November of 2008.  We will be looking separately as filtration, infrastructure, and other services in different pieces this week.

Jon C. Ogg
March 23, 2009