Aqua America: A 'Liquid' Water Sector Play

Our research is sometimes esoteric, and often way off the beaten path, but this week, we go mainstream in our never-ending quest for value. We are big believers that investors should have some exposure to water in their portfolios, but our typical ideas are not for everyone. So today, we highlight a very liquid way (no pun intended) to gain exposure to the sector.

There’s been no shortage of attention given to the growing demand for water. Theoretically, there’s the same amount of water on the earth now as there was 1000 years ago, not a drop more, or a drop less (global warming advocates: when we say water, we also include water equivalents such as ice). Yet populations continue to grow, while supplies of fresh water do not.

In the US, water distribution, supply, and treatment is typically handled at the local level. The ranks of publicly traded water utilities have continued to shrink, leaving the following list as the only publicly traded water utility plays in the US.

data as of 2/6/07
AQUA AMERICA INC (WTR)
Price:$22.83
PE: 33.57
Yield: 2.51
Market Cap: 3016

CONSOLIDATED WATER CO (CWCO)
Price:$25.54
PE: 38.12
Yield: 0.98
Market Cap: 355

CALIFORNIA WATER SERVICE GRP (CWT)
Price: 39.98
PE: 31.73
Yield: 3.11
Market Cap: 826

SJW CORP (SJW)
Price: 38.45
PE: 31.78
Yield: 1.45
Market Cap: 703

PICO HOLDINGS INC (PICO)
Price: 42.4
PE: 21.47
Yield: No Dvd
Market Cap: 672

AMERICAN STATES WATER CO (AWR)
Price: 38.99
PE: 29.32
Yield: 2.35
Market Cap: 664

SOUTHWEST WATER CO (SWWC)
Price: 13.14
PE: 32.85
Yield: 1.71
Market Cap: 310

MIDDLESEX WATER CO (MSEX)
Price: 18.69
PE: 21.99
Yield: 3.54
Market Cap: 218

CONNECTICUT WATER SVC INC (CTWS)
Price: 24.8
PE: 32.63
Yield: 3.86
Market Cap: 204

YORK WATER CO (YORW)
Price: 17.97
PE: 31.9
Yield: 2.36
Market Cap: 1.99

ARTESIAN RESOURCES CORP-CL A (ARTNA)
Price: 19.372
PE: 22.44
Yield: 3.18
Market Cap: 127

PENNICHUCK CORP (PNNW)
Price: 21.25
PE: 47.22
Yield: 3.56
Market Cap: 90

BIW LTD (BIW)
Price: 15.75
PE: 121.15
Yield: 4.23
Market Cap: 26

BIDDEFORD & SACO WATER CO (BDDD)
Price: 130
PE: unknown
Yield: 2.5
Market Cap: unknown

NEW ENGLAND SERVICE CO (NESW)
Price: 41.5
PE: unknown
Yield: unknown
Market Cap: unknown

On a price/earnings basis, most of these companies are not exactly cheap, due in part to the growing interest the sector has received from investors. Furthermore, most of the remaining publicly traded water companies are tiny in size, and have little liquidity (see BDDD and NESW). Some are not traditional water utilities (PICO, for instance, which has several other operations and CWCO, a Cayman Islands based desalination player).

Aqua America serves nearly 2.8 million customers in 13 states:

2005 Operating
Revenues
(000's)
---------

Pennsylvania $279,691
Ohio 39,839
Texas 37,953
Illinois 35,300
North Carolina 29,840
New Jersey 22,588
Indiana 16,867
Florida 15,286
Maine 9,418
Virginia 8,337
Other states 1,660
--------
$496,779
Source: 2005 10K

The company is always on the acquisiton trail, and spent $250 million in 2005 on cap ex ($195 million for the 9 months ended 9/30/06). In fact the company made 123 acquisitions in the 5 year period ended 12/31/05.

Below is WTR's acquisition philosphy:

We believe that acquisitions will continue to be an important source of growth for us. We intend to continue to pursue acquisitions of municipally-owned and investor-owned water and wastewater systems of all sizes that provide services in areas adjacent to our existing service territories or in new service areas. We engage in continuing activities with respect to potential acquisitions, including calling on prospective sellers, performing analyses and investigations of acquisition candidates, making preliminary acquisition proposals and
negotiating the terms of potential acquisitions.

Source: 2005 10K

The Fundamentals
Fiscal 2005 sales were $497 million, up 12% from 2005s $442 million. For the 9 months ended 9/30/06, sales were $397 million, so full year 2006 results should break previous annual sales records. Net income for 2005 was $91 million, representing a solid net profit margin of 18.3%. This was up from 2004's $80 million, and 18.1%. For the 9 months ended 9/30/06, net margins are lower, at 16.7%.

Conclusion
If you want to add water to your portfolio, and are not crazy about our method of doing so (PICO Holdings (PICO), JG Boswell(BWEL), we also have a position in small player Southwest Water (SWWC)), take a look at Aqua America. We strongly urge that you read through the company's 10K (always a worthwhile exercise)>

Disclosure: the author has a position in the following stocks listed in this report: PICO, BWEL, SWWC. The author does not have a position in the primary focus of this report, WTR.

WTR 1-yr chart: