Dr. Stephen Leeb submits:
With the economic recovery flagging, buyers have been hesitant to jump full force into the market. But while the S&P 500 remains underwater for the year, even with today’s rally, some more conservative stocks like utilities are coming back into favor. Case in point is Income Portfolio’s Aqua America (WTR), one of the largest publicly traded water utilities. Based in Pennsylvania, Aqua America has seen its shares outperform the market by 20 percentage points this year as they’ve reached levels last seen in April 2009.
Given the company’s recent earnings report, it’s not too hard to see why, either. The company collected $178.4 million in revenues during the second quarter, a 6.6 percent increase over the same period in the prior year. With effective cost controls, the company’s net income jumped over 15 percent year-over-year to $29.9 million. The company’s revenue stream has been helped by favorable rate decisions in many of its main states of operations, including Pennsylvania which accounts for roughly half of Aqua’s business. In addition, the company has been awarded surcharges to help cover various infrastructure investments made to improve their network reliability as well as comply with environmental requirements. All told, the already-awarded increases will add $43.7 million in annual revenues to the company’s top line (the company collected $670 million in revenues in full-year 2009). There are also almost $14 million in additional rate cases pending before four other state regulators.
The company is aggressively pursuing other infrastructure projects. Aqua America had invested over $140 million in improvements in the first half of 2010 and is on track to spend more than $300 million for the full year in efforts of further reliability and service improvement. Among the company’s projects has been solar. Already boasting a 1 megawatt solar farm, Aqua is looking at opening at 1.5 MW solar farm in Pennsylvania, adjacent to the company’s largest water treatment facility, to reduce power purchased for use at the facility.
The company’s balance sheet remains in fine shape, and management was able to successfully tap the capital markets for $70 million (via senior notes at less than 5 percent) for additional funding. With operations humming, management also increased the company’s quarterly dividend by seven percent to 15.5 cents, for a yield above 3 percent.
Shares are not overly cheap at 20 times forward earnings, but we view them as a safer way to tap the water sector. Along with other utilities, Aqua America shares could see further interest in the market as the economy at large continues to struggle in its recovery, and investors opt for companies with more consistent demand.
sewage,a nd industrial waste treatment facilities. Founded in 1954, the company has grown with the Sao Paulo state of Brazil. The company operates in 366 municipalities, treats sewage for 26 million people, and also handles rainwater drainage and management.