• Thu. Nov 24th, 2022

California Water Service Group (CWT Free Report) recently announced that its Washington Water Service (Washington Water) subsidiary has acquired the Driftwood Valley Association’s water system assets. This acquisition will add 62 customers to Washington Water’s existing customer base. Washington Water also expects to serve new customers in the association while its 21 vacant properties are being developed.

The company will continue to invest in local water infrastructure to increase the resilience of the entire operation and to provide quality services to current and future customers.

Fragmented industry needs consolidation

According to the Environmental Protection Agency, more than 51,000 municipal water systems and 16,000 municipal wastewater systems in the United States currently provide water solutions to customers. Due to a large number of small operators in the industry and a lack of sufficient funds, important infrastructure upgrades and repairs are sometimes delayed.

According to the American Society of Civil Engineers, water mains occur every two minutes in the United States due to the aging of existing water infrastructure. The ruptures in the pipeline waste 6 billion gallons of drinking water each day and contribute to losses to water utilities. Aging and lack of timely maintenance are major contributors to pipeline ruptures.

The acquisition of smaller units by larger energy suppliers secures the necessary investments for the modernization of the infrastructure and the continuation of high-quality services for the customers.

Utilities continue to consolidate

California Water Service expands its business through strategic acquisitions. In October 2022, CWT received approval to acquire the sewage system assets of Keauhou Community Services, Inc. The acquisition is expected to close in the first quarter of 2023 and add 1,500 customers. That same month, Washington Water received approval to acquire the assets of Stroh’s Water Company, which upon closing will add an additional 900 customers by the first quarter of 2023.

Other water suppliers like American Water Works (AWK free report) SJW group (SJW Free report) and Essential Utilities (WTRG Free Report) expand their activities through systematic acquisitions.

American Water Works remains focused on acquiring utilities that provide services to 5,000 to 50,000 customers. It added 79,300 customers to its base through nine completed acquisitions in four states. AWK’s pending acquisitions (as of September 30, 2022) will add an additional 21,600 customers to its base upon completion.

Zacks consensus estimate for American Water Works’ earnings in 2022 points to 4.9% year-over-year growth. The company’s current dividend yield is 1.77%. The company currently has a Zacks Rank #3 (Hold).

SJW Group has completed more than 25 acquisitions and expanded operations in the period 2010-2021. In January 2022, the acquisition of Texas Country Water in Comal, TX was completed. The transaction expanded the existing customer base by more than 1,900 water and wastewater customers. This was SJW Group’s fourth Texas acquisition in the past 12 months. Over the next five years, the company plans to invest $1.5 billion to further strengthen its infrastructure.

Zacks consensus estimate for SJW Group’s earnings in 2022 and 2023 implies year-over-year growth of 15.7% and 6.8%, respectively. It currently has a Zacks rank of #3.

In the six years ended December 31, 2021, Essential Utilities expanded its utility operations by completing many water and wastewater acquisitions, which in turn added 94,000 customers. In the first quarter of 2022, the company completed a buyout, adding 11,000 customers. Essential Utilities plans to invest $3 billion from 2022-2024 to strengthen operations and efficiently serve its growing customer base.

Essential Utilities’ long-term (three to five years) earnings growth is currently 6.2%. Zacks consensus estimate for WTRG’s earnings in 2022 and 2023 implies year-over-year growth of 6.6% and 6.5%, respectively. It currently has a Zacks rank of #3.

value for money

CWT’s shares are up 20.4% over the past six months, compared to the 7.2% industry rally.

Zacks Investment Research
Image source: Zacks Investment Research

Zacks rank

California Water Service currently has a #3 Zacks rank. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.

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