Solomon's Select, by Mark Robertson, Managing Partner November 1st, 2009
WTR is the holding company for water and wastewater utilities that serve approximately three million residents in thirteen states.
Water. It can’t help but be one of the most strategic assets for investors with long-term perspectives and I’ve long wanted to access an opportunity related to water. The recent price drop in steady Aqua America (WTR) delivers a moment of misty opportunity and at least gives us pause to take a closer look.
“We never know the worth of water until the well is dry.” — Thomas Fuller, Gnomologia (1732)
Aqua America is the holding company for water and wastewater utilities that serve approximately three million residents in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Florida, Indiana and five other states.
Aqua America (WTR): Sales History & Trend. WTR has a historical long-term sales growth trend closer to 10%. The long-term trend used in our forecast is 8.7%.
Value Line has a long-term sales per share growth forecast of 6.5%. S&P projects revenue growth of “about 10% driven by rate hikes and acquisitions.” We’re using a 8.7% sales growth forecast for WTR.
The trailing 5-year average for net margin is approximately 17.0%. Value Line has a long-term net margin forecast of 18.9%. S&P projects margin improvements based on rate cases and strategic acqusitions. Our projected net margin is 16.5%.
Aqua America (WTR): Profitability Trends. As shown here, the net margin results have swooned in recent years but are projected to recover moderately during 2009-2010.
The industry average projected P/E for Water Utilities is 20.5×. The 5-year historical average P/E is 29.7x for WTR, probably illustrating some euphoria over the investment potential of water. Value Line has a projected average P/E forecast of 25×. S&P pegs the P/E at 21x based on a solid record of earnings and dividend growth. Based on analyst consensus P/E forecasts and historical trends, a P/E of 17-25x is feasible. The current P/E was 18.8x at the time of selection. For our study, we’ve used a projected average P/E of 22×.
Expected Returns, Quality & Conclusions
Based on a price at the time of the study of $15.45, the projected annual return was approximately 14%. WTR has an excellent quality rating (81.5).
“Water flows uphill towards money.” — Anonymous, saying in the American West, quoted by Ivan Doig in Marc Reisner, Cadillac Desert, 1986.