Connecticut Water Thriving On Buyouts, Regulated Business

On Jun 23, 2016, we initiated coverage on water and waste water service provider Connecticut Water Service Inc. (NASDAQ:CTWS) . The company is well positioned to gain from strategic acquisitions and its regulated operations. However, weather fluctuations and stringent regulations are headwinds for the company.

Connecticut Water Service’s first-quarter 2016 earnings per share were lower than the Zacks Consensus Estimate and flat year over year. However, total revenue increased on a year-over-year basis due to the implementation of new water rates in Maine.

Going forward, Connecticut Water Service is poised to benefit from strategic acquisitions of smaller water service providers. In the last seven years, the company has made 40 acquisitions, all in sync with its expansion plans. Acquisitions made since 2012 have increased its customer base by 37%. Overall, contributions from organic and inorganic assets have placed the company on a strong financial footing.

On the other hand, Connecticut Water Service derives nearly 92% of its earnings from its regulated operations. The company aims to invest nearly $150 million in the 2016–2018 time frame to strengthen its existing water infrastructure. This will definitely help the company to serve its expanding customer base more efficiently.

However, the company is subject to extensive federal and state environmental protection and health and safety laws and regulations. These laws and regulations change frequently and the companies are expected to comply within a stipulated time period, which increases their operating costs. Any failure to comply with regulations might lead to fines and sanctions from regulatory authorities.

Despite safety measures, this water and wastewater service provider always runs the risk of failure of main reservoirs and pipelines. In addition, there is a possibility of contamination of water sources, which will entail additional costs for the company to remove the polluted water from the system and substitute with water from an uncontaminated water source or provide additional treatment.

Connecticut Water Service currently has a Zacks Rank # 2(Buy). Other favorably placed stocks in the same space, sharing an equal rank with Connecticut Water Service, include Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS) , Artesian Resources Corp. (NASDAQ:ARTNA) and Consolidated Water Co. Ltd. (NASDAQ:CWCO) .

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days .Click to get this free report >>