American Water Unit To Invest $3.6M In Infrastructure Upgrade

American Water Works Company (NYSE:AWK) announced that its subsidiary, New Jersey American Water has decided to invest nearly $3.6 million over the next few months in water infrastructure improvement projects in North Plainfield and Green Brook Township.

The infrastructure upgrade has already begun. New Jersey American Water will replace service lines from the mains and install meter pits at the curb area of each property along the route. Work is expected to be complete in spring 2017.

The American Water Works subsidiary will be involved in cleaning and lining water mains in order to increase the efficiency of the water mains and extend the pipelines’ life.

Upgrade of Infrastructure

American Water Works is investing consistently to improve and expand infrastructure. The company aims to invest $6.4 billion in the 2016–2020 time frame, which will boost its earnings by 7% to 10% per year during this period.

For 2016, American Water Works has allocated $1.4–$1.5 billion for improving its water and wastewater systems, and the ongoing investments by its subsidiaries are part of its long-term plans of upgrading and replacing old pipelines. Last month, New Jersey American Water announced various plans to invest a total of nearly $17.4 million in pipeline replacement and upgradation of the existing system.

Last week too, the unit announced plans to invest nearly $1.6 million of new water mains in Stuyvesant Avenue from Chestnut Street to Vauxhall Road in Union. (Read more:American Water Unit to Invest $1.6M in Pipeline Replacement)

Upgrade and Replace – Need of the Hour

At present, a major portion of the U.S. water infrastructure is old and worn out, which calls for regular investments in their replacement by the major water utilities.

An Environment Protection Agency (EPA) report projects capital investment of $384.2 billion in upgrading drinking water lines and $298.2 billion in changing wastewater lines during the 2011–2030 time period. On the other hand, a careful analysis by the American Water Works Association (AWWA) shows that about $1 trillion will be needed over the next 25 years only to restore underground pipes.

Similarly, other water and wastewater service providers are investing regularly to upgrade the existing systems. Aqua America Inc. (NYSE:WTR) has plans to make capital investments of over $350 million in 2016 as part of an ambitious investment target of over $1.1 billion in the 2016–2018 period. On the other hand, Connecticut Water Service Inc. (NASDAQ:CTWS) aims to invest more than $150 million in the 2017–2019 time frame to strengthen the existing water infrastructure.

Price Movement

Over the last one year, American Water Works has been underperforming the Zacks Categorized Utility-Water Supply industry. Over the last one year, the company’s shares have returned 27.8%, compared with the industry’s return of 29.6%.

Note that the company maintained an outperformance up to Sep 2016. However, in case of an interest rate hike in the near term, American Water Works’ cost of capital would rise. In addition, its current ratio of 0.42 indicates that it would be difficult for the company to qualify for a loan on favorable terms.

Zacks Rank & a Key Pick

American Water Works currently has a Zacks Rank #3 (Hold). A better-ranked stock in the same space is SJW Group (NYSE:SJW) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SJW’s earnings surpassed the Zacks Consensus Estimate by 104.4% in the last reported quarter. Over the last 60 days, its 2016 estimates have improved 20.7% to $2.27.

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