Below are the valuation targets for SJW Group (SJW) for the next 10 years. Continue reading
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Water Utilities Look Affordable
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 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 (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 (SJW) | $23.56 | P/E | $22.28 | -4.74% |
| P/B | $27.89 | 19.25% | ||
| P/S | $30.94 | 32.27% | ||
| P/C | $32.61 | 39.43% | ||
| California Water (CWT) | $36.90 | P/E | $46.02 | 25.09% |
| P/B | $42.36 | 15.15% | ||
| P/S | $40.53 | 10.16% | ||
| P/C | $38.61 | 4.94% | ||
| AquaAmerica (WTR) | $16.75 | P/E | $20.93 | 25.00% |
| 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.”-Touc
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Posted in AWR, CWT, SJW, water utilities
Water Utilities on the Move
Yesterday, water utilities were on the move because Los Angeles-based, Dividend Achiever Southwest Water Company (SWWC) announced that it was being bought by Water Asset Management, LLC in a deal valued at $427 million. The stock of Southwest Water Company (SWWC) jumped 46% during market hours. On the news, almost all other water utility companies moved higher as seen in the table below.
It should be noted that of the eight companies listed above, San Jose Water (SJW), American States Water (AWR), California Water Service (CWT), AquaAmerica (WTR), American Water Works (AWK) and Consolidated Water (CWCO) are Dividend Achievers. In the last month, San Jose Water (SJW), California Water (CWT), AquaAmerica (WTR) and American States Water (AWR) have been on our Dividend Achiever Watch List at the same time. The New Low Observer had issued Investment Observations on AquaAmerica (WTR) on October 31, 2009 and the other on California Water Service (CWT) on January 3rd.
As a general observation of our Dividend Acheiver Watch List and our Nasdaq 100 Watch List, when companies from an industry start to cluster on the list we know that whatever cyclical forces are at play require us to look closely at that industry and those companies. Although we have sold our initial investment in AquaAmerica (WTR), we subsequently acquired a "substantial" position in California Water Service (CWT).
Anyone interested in the qualitative elements of water utilities should be mindful of our boiler plate warning on investments in the industry:
"Although water is critical to life, investors need to understand that companies in this industry aren't a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, municipalities will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to companies like these due to the critical importance of the resource being sold."
Despite my personal concerns on the water utility industry, I encourage readers to follow our Watch Lists closely for potential signs of other exceptional investment opportunities.
-Touc
Email our team here.