According to the American Water Works Association, approximately $1 trillion is necessary to maintain and expand water service to meet demand over the next 25 years. This reality, coupled with the fact that infrastructure has been on the lips of pundits and politicians recently, suggests that examining water utility stocks is a worthy endeavor.
So let’s consider two of the leaders in the industry, Aqua America (NYSE:WTR) and Connecticut Water Service (NASDAQ:CTWS), to see which company affords investors the best choice in terms of getting their feet wet (or wetter) with a water utility investment.
Getting to know you
Providing water services to customers for more than 130 years, Aqua America is the second-largest publicly traded water service provider by market cap. From humble beginnings in Pennsylvania’s Delaware County, Aqua America now serves more than 3 million people across eight states. At the other end of the the water utility pool is Connecticut Water. The largest New England-based publicly traded water utility, Connecticut Water serves about 129,000 customers in Connecticut and Maine.
To round out this introduction to the the two companies, let’s compare them on some important metrics to gain better insight.
|Company||Market Cap||FY 2016 Revenue||FY 2016 Earnings per Share||FY 2016 Operating Margin||Return on Equity (3-Year Avg.)|
|Aqua America||$5.8 billion||$819.9 million||$1.32||39.7%||13.10%|
|Connecticut Water Service||$587.4 million||$98.7 million||$2.08||31.2%||10.39%|
Based on this peek at the company’s financials, there is no winner. Connecticut Water, apparently, had more to show on the bottom line last year, but it’s Aqua America that has been more successful over the past three years at converting shareholders’ investments into profits. Now that we’ve dipped our toes in the water, let’s jump in with both feet and get to know these two companies better.
The case for Aqua America
When considering water utility stocks, one of the most important factors to look at is the company’s customer base, for relying too heavily on any one market is a significant risk. In this regard, Aqua America has the edge over Connecticut Water. With regulated operations in eight states, Aqua America is far less susceptible to local adverse weather conditions (among other things) than Connecticut Water, which operates in only two states.
Although Aqua America largely depends on Pennsylvania — the state accounted for 52% of operating revenue in fiscal 2016 — the situation is far less worrisome than Connecticut Water’s reliance on Connecticut to provide 95% of operating revenue during the same period.
The diversified customer base affords Aqua America another advantage: potential acquisitions. Often, water utilities will seek acquisitions in proximity to their current operations to achieve greater efficiencies….