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As we have indicated in our February 26th posting,

As a sector, the water utilities are the most undervalued in our Dividend Achiever Watch List.

After the rumblings in the water utility sector this past week with the announced acquisition of Southwest Water Company (SWWC) by Water Asset Management LLC, we have decided to outline the potential price and percentage change that the stocks would go to if they only went to the 10-year average for the respective fundamental valuation metric.

However, as has been pointed out by Warren Buffett in his 2009 annual report,

Even evaluations covering as long as a decade can be greatly distorted by foolishly high or low prices at the beginning or end of the measurement period.

Company Price

Valuation

Target

% Up

American States Water (NYSE:AWR) $34.62

P/Earnings

$37.27

7.88%

P/Book $36.12 4.55%
P/Sales $38.80 12.30%
P/Cashflow $40.29 16.61%
San Jose Water $23.56 P/E $22.28 -4.74% -
(NYSE:SJW) P/B $27.89 19.25%
P/S $30.94 32.27%
P/C $32.61 39.43%
California Water $36.90 P/E $46.02 25.09%
(NYSE:CWT) P/B $42.36 15.15%
P/S $40.53 10.16%
P/C $38.61 4.94%
AquaAmerica $16.75 P/E $20.93 25.00%
(NYSE:WTR) P/B $23.70 41.56%
P/S $23.95 43.05%
P/C $24.76 47.92%

Data Source: Morningstar.com

Again, the target prices are based on the 10-year average for the given valuation metric. Of the water companies above, AquaAmerica (WTR) has the highest average upside potential of 39% for all four valuation categories. Although San Jose Water (SJW) is not currently on our Watch List, but it has the second highest average upside potential of 21%.California Water (CWT) and American States Water (AWR) followed closely behind with an average upside potential of 13% and 10% respectively.

The biggest risk factor for water utilities is interest rates. If, for some reason, there is a spike in interest rates, then all utilities will suffer tremendously. As we are at historical lows in the cycle for interest rates, we can only expect that there is greater risk of rates rising than falling. Even if rates were to fall, there is little to fall from, whereas, there is tremendous upside.

Despite our seemingly aggressive investment strategy, we only consider the mean as the best guess of the potential for where these water stocks might go. In addition, we enter into every transaction accepting the possibility that any investment might fall at least 50% as outlined in our article titled “A Simple Way to Avoid Losing Money in Stocks.”

Disclosure: Author holds a long position in CWT

Source: Water Utilities Look Reasonably Priced