Investing

Would a Biden Presidency Improve the Outlook for These 8 Water Companies?

Paul Ausick

Published: August 14, 2020 7:50 am

Last Updated: August 30, 2022 12:24 pm

Among the goals set out by presidential candidate Joe Biden in his infrastructure and clean energy plan is “ensuring clean, safe drinking water” in every American community. To reach that goal, Biden proposes investing in repairing water pipelines and sewer systems, replacing lead service pipes, upgrading waste treatment plants and integrating efficiency and quality monitoring technologies.

Those investments will require significant expenditures, and to that end, Biden has proposed a four-year, $2 trillion infrastructure program to fund these and other infrastructure-related programs.

Cleaning up trouble spots typically is relegated to specialized firms that have the knowledge and expertise to perform this complicated and expensive work. Publicly traded firms that supply water to municipalities of all sizes are responsible for meeting regulatory restrictions in the systems they operate.

For example, in July the U.S. Environmental Protection Agency (EPA) announced a final rule that reduces the lead content in public water systems, homes, schools and other facilities from a prior maximum of 8% to a new limit of 0.25%. The final rule applies to new construction and to the replacement of existing plumbing systems.

It was the change in the source of the water supply to Flint, Michigan, in 2014 that triggered the increased amount of lead in the city’s water supply. The new supply flowed through old and highly corrosive lead pipes.

An amendment to legislation in the U.S. House of Representatives authorizes spending $4.5 billion annually for five years to replace all the lead service pipes in the country, with priority given to disadvantaged communities that are exposed to a disproportionate share of environmental-related health threats.

The most recent four-year “report card” from the American Society of Civil Engineers includes an estimate of the investment needed to bring U.S. infrastructure back to a better-than-passing grade. The last report was completed in 2017 and set the country’s needed infrastructure investment at $2 trillion over the 10-year period between 2016 and 2025.

Upgrading the country’s water and wastewater infrastructure was estimated to require about $150 billion in funding, with just $45 billion of that estimated to be available. That $105 billion gap marks a funding target for spending under a Biden administration.

The American Water Works Association, an organization for water systems professionals, has made a far higher estimate of the funding needed to repair and replace the country’s water systems: $1 trillion to upgrade nearly a million miles of underground pipe, much of which is nearly 100 years old and in critical need of being replaced.

Here we look at eight companies, five that provide water supplies to cities and towns and three that provide the pumps, valves, pipes and equipment that transport and treat water and wastewater. The regulated water suppliers currently make capital investments in upgrading and replacing their infrastructure.

All have market caps greater than $1 billion, and all but one currently trade at about 25 times or more their expected 2021 earnings. Compared to the S&P 500’s year-to-date gain of around 4.6%, water utilities’ stocks have added nearly 16% this year.

American Water Works

With a market cap of around $26.4 billion, American Water Works Co. Inc. (NYSE: AWK) is the largest publicly traded water and wastewater service firm in the United States. The company serves some 15 million customers in 46 states. Both its size and its geographic diversity might be attractive to investors.

Its stock closed Thursday at $146.52, up about 0.5% for the day, in a 52-week range of $92.00 to $150.47. The price target on the stock is $143.15, about 2.3% lower than the closing price, which remains about 2.6% below the 52-week high. Based on expected 2021 earnings of $4.22 per share, the stock trades at a multiple of 34.7. American Water Works pays a dividend yield of 1.51%.

Essential Utilities

The country’s second-largest regulated water services firm, Essential Utilities Inc. (NYSE: WTRG) has a market cap of around $11.1 billion. It also has 3 million customers in eight states, all east of the Mississippi River. The company also operates natural gas pipelines through its Peoples subsidiary. Until February of this year, the company was known as Aqua America.

The stock closed $45.32 a share on Thursday, down about 1% for the day, in a 52-week range of $30.40 to $54.52. The stock trades at 27.3 times expected 2021 earnings, and with a price target of $49.00, it has a potential upside of 8.1%. Essential pays a dividend yield of 2.2% and is currently trading about 17% below its 52-week high.

Watts Water Technologies

Watts Water Technologies Inc. (NYSE: WTS) manufactures and sells products and systems that manage the flow and conservation of water resources. The company serves residential and commercial customers worldwide, and its products, from valves to filtration systems and drains, will be in greater demand if spending on water infrastructure is forthcoming. Watts was founded in 1874 and has a market cap of about $3.2 billion.

Watts stock closed at $94.31 on Thursday, down about 0.2%, in a 52-week range of $69.02 to $114.45. Shares traded about 18% below their 52-week high but nearly 8% above their consensus price target of $87.00. The stock closed at 24.7 times expected 2021 earnings. The dividend yield here is 0.97%.

Not only does American States Water Co. (NYSE: AWR) provide water service to about 285,000 California customers, but also water system services to U.S. military bases around the country under long-term (50 years) contracts. Military contracts are a mainstay of water companies’ profits because the contracts typically offer better margins and longer terms than do municipal deals. The firm’s market cap is about $2.9 billion.

Shares closed Thursday at $78.99, down about 1.6% for the day, in a 52-week range of $65.11 to $96.64. At the closing price, the stock traded at about 32.5 times expected 2021 earnings and more than 18% below its 52-week high. The company pays a dividend yield of 1.72%.

California Water Service

California Water Service Group (NYSE: CWT) is the fifth-largest publicly traded water utility and services group in the country, with a market cap of about $2.4 billion. It serves more than 500,000 customers in California, Hawaii and Washington. In the second quarter, the company’s results were negatively affected by a delay in its general rate case in California.

Its stock closed at $48.37 on Thursday, down about 0.5%, in a 52-week range of $39.74 to $57.48. Shares trade around 16% below their 52-week high, with a potential upside of 2.7% based on a price target of $49.67. The stock trades at about 28.5 times expected 2021 earnings, and the dividend yield is 1.77%.

Evoqua Water Technologies

This supplier of a variety of specialty equipment and services to serve the water and wastewater industry has a market cap of about $2.4 billion. Evoqua Water Technologies Corp. (NYSE: AQUA) customers include semiconductor manufacturing firms, specialty chemical firms, pulp and paper companies, and many other industries. Last week the company priced a secondary stock offering of 8 million shares at $20.75.

Shares closed down about 1% at $20.81 on Thursday. Their 52-week range is $7.09 to $25.23. With a price target of $20.70, shares are roughly fully valued but remain about 17.5% below the 52-week high. Based on expected 2021 earnings, the stock trades at a multiple of 34.1, the highest of any stock in this group. Evoqua does not pay a dividend.

SJW

While SJW Group (NYSE: SJW) provides water and water services throughout the United States, its main area of operations is around San Jose, California, where the company serves 231,000 customers. Including all its owned and operated water services, the company serves some 1.5 million customers in the United States. SJW’s market cap is about $1.95 billion.

The stock closed Thursday at $68.64, up about 0.2%, in a 52-week range of $45.60 to $74.99. With a price target of $72.40, shares have a potential upside of 5.5% and trade at 8.65% below the 52-week high. Based on expected 2021 earnings, the stock trades at a multiple of about 28. The dividend yield on the stock is 1.93%.

Forterra

Forterra Inc. (NASDAQ: FRTA) manufactures and sells pipe and precast products used in drainage and water supply projects to customers in North America. The company’s market cap was right around $1 billion (before Thursday’s drop) and around 80% of the stock is held by institutional investors. The consensus full-year earnings per share estimate has risen by $0.80 per share in the past three months and more than doubled in the past month.

Shares closed at $14.94 on Thursday, down 3.7% for the day, in a 52-week range of $3.45 to $15.97. With a price target of $16.00, the stock’s implied gain is about 5.8%, and shares trade about 6.5% below the 52-week high. But the company’s longer term value is just 14 times expected 2021 earnings, suggesting that a serious adjustment to either the share price or the estimates is due. Forterra does not pay a dividend.

The needed spending on water does not end here. In addition to upgrading the country’s water systems, the federal government also may be called up to close a funding gap of $39.4 billion between an estimated $45 billion needed to repair aging dams and just $5.6 billion currently available for the purpose. Strictly speaking, fixing America’s 15,500 high-hazard dams will be infrastructure construction projects.