Here's Why You Should Steer Clear Of Consolidated Water Now

Consolidated Water Co. Ltd. (NASDAQ:CWCO) , which carries a Zacks Rank #4(Sell), missed earnings estimates in the last three quarter with an average negative surprise of 20.33%. In addition, earnings estimates for 2018 and 2019 dropped 10.9% and 6.6%, respectively, in the last 60 days.

Adhering to safety measures is important for water-utilities. Despite safety measure Consolidated Water like other water utilities faces the risk of contamination of processed water that may result in disruption of services and adversely affect revenues. Further, maintenance of services might result in extra cost.

In 2017, Consolidated Water generated nearly 45% of its total revenues from its two major customer account. Failure to renew contract with any of these customer account will adversely impact the company's operations, cash flow and financial conditions.

The company is trading at a premium at the current valuation level. Consolidated Water’s P/E (F1) multiple trading is at 22.77 compared with industry average of 14.52. Return on equity of 5.36% is lower than the industry average of 15.2%. The water utilities are subject to certain federal and state environmental laws, regulations as well as weather conditions. Unfavorable economy, weather conditions and level of tourism can impact demand for water.

However, the company continues to look for new opportunities to expand operation in markets that have significant requirements for potable water The Rosarito project, the upcoming project in Mexico, will boost the company's performance.

Consolidation in Water Space

Consolidation is the need of the hour in the fragmented U.S. water utility space. The water utility infrastructure in the United States is getting old and needs ample investments, which are easier for bigger players to make. Consolidation would therefore drive the necessary infrastructure overhauls that have become imperative for the industry at large.

In February 2016, Consolidated Water acquired a 51% interest in Aerex Industries, Inc. The contribution from the acquired Aerex assets boosted the revenues from its Manufacturing segment in 2017.

Connecticut Water Service (NASDAQ:CTWS) signed an agreement to merge with SJW Group SJW). Following the completion of the transaction, the combined company may become one of the largest water and wastewater service providers in the United States. It will serve nearly 1.5 million customers in multiple states.

Illinois American Water, a subsidiary of American Water Works (NYSE:AWK) , acquired the Village of Fisher’s water and wastewater systems for $6.8 million. This acquisition is likely to add nearly 850 new water and wastewater customers to its base. American Water Works carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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