Friday, February 09, 2007

A Mainstream Water Play: Aqua America (WTR)

At Cheap Stocks, our research is sometimes esoteric, and often way off the beaten path, but this week, we go mainstream in our never-ending quest for value. We are big believers that investors should have some exposure to water in their portfolios, but our typical ideas are not for everyone. So today, we highlight a very liquid way (no pun intended) to gain exposure to the sector.

There’s been no shortage of attention given to the growing demand for water. Theoretically, there’s the same amount of water on the earth now as there was 1000 years ago, not a drop more, or a drop less (global warming advocates: when we say water, we also include water equivalents such as ice). Yet populations continue to grow, while supplies of fresh water do not.

In the US, water distribution, supply, and treatment is typically handled at the local level. The ranks of publicly traded water utilities have continued to shrink, leaving the following list as the only publicly traded water utility plays in the US.

data as of 2/6/07
(WTR) AQUA AMERICA INC
Price:$22.83
PE: 33.57
Yield: 2.51
Market Cap: 3016


(CWCO)CONSOLIDATED WATER CO-ORD SH
Price:$25.54
PE: 38.12
Yield: 0.98
Market Cap: 355

(CWT) CALIFORNIA WATER SERVICE GRP
Price: 39.98
PE: 31.73
Yield: 3.11
Market Cap: 826

(SJW) SJW CORP
Price: 38.45
PE: 31.78
Yield: 1.45
Market Cap: 703


(PICO) PICO HOLDINGS INC
Price: 42.4
PE: 21.47
Yield: No Dvd
Market Cap: 672


(AWR) AMERICAN STATES WATER CO
Price: 38.99
PE: 29.32
Yield: 2.35
Market Cap: 664

(SWWC) SOUTHWEST WATER CO
Price: 13.14
PE: 32.85
Yield: 1.71
Market Cap: 310


(MSEX) MIDDLESEX WATER CO
Price: 18.69
PE: 21.99
Yield: 3.54
Market Cap: 218


(CTWS) CONNECTICUT WATER SVC INC
Price: 24.8
PE: 32.63
Yield: 3.86
Market Cap: 204


(YORW) YORK WATER CO
Price: 17.97
PE: 31.9
Yield: 2.36
Market Cap: 1.99


(ARTNA) ARTESIAN RESOURCES CORP-CL A
Price: 19.372
PE: 22.44
Yield: 3.18
Market Cap: 127

(PNNW) PENNICHUCK CORP
Price: 21.25
PE: 47.22
Yield: 3.56
Market Cap: 90


(BIW) BIW LTD
Price: 15.75
PE: 121.15
Yield: 4.23
Market Cap: 26


(BDDD) BIDDEFORD & SACO WATER CO
Price: 130
PE: unknown
Yield: 2.5
Market Cap: unknown


(NESW) NEW ENGLAND SERVICE CO
Price: 41.5
PE: unknown
Yield: unknown
Market Cap: unknown



On a price/earnings basis, most of these companies are not exactly cheap, due in part to the growing interest the sector has received from investors. Furthermore, most of the remaining publicly traded water companies are tiny in size, and have little liquidity (see BDDD and NESW). Some are not traditional water utilities (PICO, for instance, which has several other operations and CWCO, a Cayman Islands based desalination player).

Aqua America serves nearly 2.8 milliom customers in 13 states:

2005 Operating
Revenues
(000's)
---------

Pennsylvania $279,691
Ohio 39,839
Texas 37,953
Illinois 35,300
North Carolina 29,840
New Jersey 22,588
Indiana 16,867
Florida 15,286
Maine 9,418
Virginia 8,337
Other states 1,660
--------
$496,779
Source: 2005 10K ========


The company is always on the acquisiton trail, and spent $250 million in 2005 on cap ex ($195 million for the 9 months ended 9/30/06). In fact the company made 123 acquisitions in the 5 year period ended 12/31/05.

Below is WTR's acquisition philosphy:

We believe that acquisitions will continue to be an important source of growth for us. We intend to continue to pursue acquisitions of municipally-owned and
investor-owned water and wastewater systems of all sizes that provide services
in areas adjacent to our existing service territories or in new service areas.
We engage in continuing activities with respect to potential acquisitions,
including calling on prospective sellers, performing analyses and investigations
of acquisition candidates, making preliminary acquisition proposals and
negotiating the terms of potential acquisitions.

Source: 2005 10K


The Fundamentals
Fiscal 2005 sales were $497 million, up 12% from 2005s $442 million. For the 9 months ended 9/30/06, sales were $397 million, so full year 2006 results should break previous annual sales records. Net income for 2005 was $91 million, representing a solid net profit margin of 18.3%. This was up from 2004s $80 miillion, and 18.1%. For the 9 months ended 9/30/06, net margins are lower, at 16.7%.


Conclusion
If you want to add water to your portfolio, and are not crazy about our method of doing so (PICO Holdings (PICO), JG Boswell(BWEL), we also have a position in small player Southwest Water (SWWC)), take a look at Aqua America. We stongly urge that you read through the companies 10K (always a worthwhile exercise)>

*The author has a position in the following stocks listed in this report: PICO, BWEL, SWWC. The author does not have a position in the primary focus of this report, WTR. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

2 comments:

Anonymous said...

Aqua America stock price has fallen 25% in 2006.
I would look at Watts water as Jim cramer has reported.
BooYah!

JP said...

Speaking of water investments, there's another water ETF on tap. Roger Nusbaum has the details:

etf.seekingalpha.com/article/26776