Infrastructure

Essential Utilities May Be the Last Cheap Stock for Water Investors

If any sector is both defensive and a must-own for all investors, utilities comes to mind. In particular, water is about as defensive as it gets. Investors have known for more than a decade that they should have some exposure to water in their portfolios.

Water is the source of life. People can endure days without food, but trying to go more than a few days without water will result in paying the ultimate price. Almost every business and aspect of government also requires water in some form. Investors have caught on to this and have ridden most companies with water exposure much higher. There is just one problem for investors looking to capitalize on the future of water: all the water utilities have high valuations, and the stocks now look incredibly expensive compared with relative sectors.

A recent evaluation of the water-related theme showed only a few companies still have much implied upside. Those are of course based on the current share prices having appreciated, but one water utility that still may have plenty of implied upside is Essential Utilities Inc. (NYSE: WTRG).

Many investors do not know of Essential Utilities by name. This is the country’s second-largest regulated water utility, with a market cap of more than $10 billion. It was called Aqua America in the past, and the new name is the result of its acquisition of and merger with the natural gas distribution company Peoples. That was an all-cash transaction with an enterprise value of $4.275 billion, after it assumed roughly $1.1 billion of debt.

Investors are willing to pay up handily for water, but combining water and gas and enduring a name change may have made it harder for investors to want to step up to the plate here. There is also an issue with anything to do with climate change to consider. That said, Essential Utilities may be the last cheap stock for investors who want to own a major water utility stock. That is at least part of the take from Janney’s Michael Gaugler.

With shares closer to $44.50, Janney has an Outperform rating and a $70 price target. Investors should be aware of two things here before delving into the reasons for such strong upside. First and foremost, investors should never use a single research report as their sole reason for buying (or selling) a stock. The second issue is that Gaugler’s fair value estimate is the so-called street high target price.

Gaugler sees Essential Utilities posting higher earnings, and he raised his estimates to adjusted $0.28 a share from $0.23 for the coming quarter. This is based on favorable weather patterns for both its water and natural gas segments during the April through June period. The full-year adjusted earnings guidance is currently $1.53 to $1.58, but Gaugler sees that range potentially tighten or increase if the favorable weather patterns continue to go in its favor.