Aqua America (WTR) Thriving On Investments & Acquisitions

On Jun 6, 2016, we initiated a research report on Aqua America, Inc. (NYSE:WTR) . The fresh water supplier and wastewater service provider continues to expand its operations through organic and inorganic means. Aqua America’s wide network of water and wastewater assets helps it to provide consistent services to its growing customer base. However, stringent regulations, chances of water contamination and fluctuating weather conditions are some of the inherent risks for the company.

Aqua America reported mixed results in the first quarter of 2016, wherein its earnings beat the Zacks Consensus Estimate but revenues lagged the same. Earnings also grew year over year on the back of higher contribution from the regulated business segment, which was driven by infrastructure investment.

Water utilities are required to make massive investments for upgrading and maintaining their aging infrastructure. In the U.S., the existing water system is aging and may fail at any point of time despite ongoing repairs and overhauls. As per an Environment Protection Agency (EPA) report, in next two decades, a capital investment of $384.2 billion will be required to upgrade drinking water lines, while $298.2 billion is needed for wastewater lines.

This gives water utilities immense opportunities to expand their regulated operations. As a result, Aqua America aims to spend more than $350 million as capital expenditure in 2016 and over $1.1 billion in 2016 through 2018. The company expects rate base growth of 6–7% in 2016 backed by systematic investments.

At present, the water utility space is quite fragmented. Consolidation of the space is thus the need of the hour, as it will strengthen and expand the existing water and wastewater systems of the country. Large operators have the required financial strength to undertake such large capital expenditure projects and make strategically prudent acquisitions.

On the acquisitions front, Aqua America is striving to expand its market footprint through strategic deals. Year to date (May 3, 2016), the company has completed a number of acquisitions in its service territories, adding 5,250 customers to its existing customer base. In fact, the company expects to expand its customer base by 1.5–2% in 2016 on the back of strategic acquisitions and organic growth.

On the flip side, failure to secure essential funds from the capital markets at favorable rates might impact Aqua America’s business.

Aqua America currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some better-ranked stocks in the same space are Artesian Resources Corporation (NASDAQ:ARTNA) Consolidated Water Co. Ltd. (NASDAQ:CWCO) and SABESP (NYSE:SBS) . All of these carrying a Zacks Rank #2 (Buy).