Infrastructure
Huge Upside Valuation Calls in Water Utilities (AWK, WTR, CWT, AWR)
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There remains substantial value, growth, and income opportunity in the water sector. This has been our take for some time, and a report out of Gabelli & Company this morning is further highlighting this. In fact, Gabelli’s “private market value” is far more aggressive than our own internal model and they have an implied upside of close to 30% to 50% higher on average if you look out to the end of 2013. Keep in mind that these are not exactly official price targets, but they are upside valuation calls under deal, restructuring, and other forms of valuation.
The water utilities covered by Gabelli were American Water Works Company, Inc. (NYSE: AWK), Aqua America Inc. (NYSE: WTR), California Water Service Group (NYSE: CWT), and American States Water Company (NYSE: AWR).
Gabelli’s research noted, “Water utility stocks and the S&P Composite are unchanged year-to-date, which compares to an 11% advance for the S&P Utilities Index… we believe the water and wastewater industry is ripe for new rounds of consolidation and privatization as the sector is in the early stages of an extended period of restructuring.”
American Water Works Company, Inc. (NYSE: AWK) currently trades at $30.80 and it remains our own personal favorite for water investors. We think this can go to the mid-$30’s or even get closer to $40 ultimately, but we are way short of Gabelli’s “private market value.” Thomson Reuters has a consensus price target of $34.00, but Gabelli’s “PMV” is all the way up at $44.00 for this year, $47.00 for 2012, and $49.00 for 2013. Cited are strong earnings growth, proposed water rate hikes, acquisitions, and asset changes.
Aqua America Inc. (NYSE: WTR) currently trades around $22.00 is also given high upside marks by Gabelli and its private market values are as follows: $27.00 for 2011, $28 for $2012, and $30 for 2013. This upside is based upon strong credit ratings and a low-risk business model which has both a cost-driven model and a growth oriented culture. Thomson Reuters has a consensus price target of about $24.60.
California Water Service Group (NYSE: CWT) trades around $18.80 and Gabelli calls it a high-quality water utility with a strong balance sheet (46% common equity) with an A+ investment-grade rating. Recent and pending rate relief were also cited as strengths. Gabelli’s private market value is $24.00 for 2011, $27.00 for 2012, and $28.00 for 2013. Thomson Reuters has a consensus price target of $21.00.
American States Water Company (NYSE: AWR) trades around $35.50 and Gabelli noted a strong balance sheet (53% common equity), an ‘A+’ investment-grade ratings, recent and pending rate activity, a 3.2% dividend, and privatization contracts. Gabelli gives a private market value rating as follows: $48.00 for 2011, $50.00 in 2012, and $53.00 in 2013. Thomson Reuters has a consensus price target of $38.34.
Again, these private market value ratings are not exact price targets. They are meant to show implied upside bands under certain situations. The Thomson Reuters consensus price targets are generally 10% above current share prices.
JON C. OGG
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