Industry ABC: Water Utilities

**springsnailt** Thu Mar 16, 2006 11:08 pm

Industry ABC: Water Utilities
Learning together... and participating the article submission.
Comments welcome.

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1. Environment:

Relatively heavy government regulation, both in terms of water
quality and in terms of pricing. Seasonality influences earnings,
especially during the summer when entertainment usage increases
(regulation may influence income here whenever there is a
shortage).

2. Market:

segregated market, many controlled by state or local government.
WTR is the largest, with about $3-4B capital, serving 2.5M (not 25M,
corrected) population. So the total US market may, by very rough
estimate, have a market value (if everything is public) of $500B.

3. Business:

Two types - Water and Wastewater

4. Capital Structure:

heavy debt, interest rate sensitive, net tangible assets is usually
negative because of the debt structure.

5. Evaluation variables:
EBITA/EV is rarely > 0.05. To some extent, this whole industry is
not an interesting industry to invest for capital gains.

PE: low price/earnings ratio, mostly between 7 and low teens. Tend
to bounce back up when PE is low (~7.xx).

6. Cost and Margin:

operating margin 20-25%, net margin ~10% (not bad!)

7. Competition:

Minimal

8. Customers:

Not important other than population

9. Growth:

mainly through merger and acquisition, low growth stalwarts

10. Overall evaluation:

A regulated monopoly with extremely stable business. Not bad to
own but worth investing only in extremely depressed occasions
(i.e., PE~7.xx, for the moment No company in this industry fulfills
this condition).

**jinbai** Thu Mar 16, 2006 11:23 pm

I guess water will be booming in the near future, people will need pure and clean water badly as the quality of life is increasing. About two years ago, I remember ion was bought by GE, the stock jumped 100%. I also happened to invest cwco for over a year, with 40% gain, if I kept holding it untill now, it was already over double. Anyway, that is good sector.

**springsnailt** Thu Mar 16, 2006 11:28 pm

2-3 years ago most water utility stocks were more or less depressed (PE 7-8.5), now they are around average in recent history. the market is very local, so booming metropolitan areas may provide more business opportunity.

jinbai wrote: I guess water will be booming in the near future, people will need pure and clean water badly as the quality of life is increasing. About two years ago, I remember ion was bought by GE, the stock jumped 100%. I also happened to invest cwco for over a year, with 40% gain, if I kept holding it untill now, it was already over double. Anyway, that is good sector.

**springsnailt** Fri Mar 17, 2006 1:52 pm

BTW, CWCO is a foreign utility company. The scenario is quite different from US-based water utilities.

jinbai wrote: I guess water will be booming in the near future, people will need pure and clean water badly as the quality of life is increasing. About two years ago, I remember ion was bought by GE, the stock jumped 100%. I also happened to invest cwco for over a year, with 40% gain, if I kept holding it untill now, it was already over double. Anyway, that is good sector.

**jinbai** Fri Mar 17, 2006 2:59 pm

Yes, it is. But it seems runned by america people or in american way. Actually I have read their 10K, both online ones and ones they sent to me. They are very conserved manage team, very good. Last year, split was a very good move, unfortunately, I missed the chance after splits. Well, the main reason, I like it, is they are the only one solid pure water company, essentially, almost no competition around them. Therefore, as long as they can keep the current growth rate, investing in them is very little risk. But, at current level, it may not be very good time.

BTW, if you invest them 5 years ago, until now, it is about over 5 bags, about 38% gain per year, very good! That is pretty much what I got last two years.

springsnailt wrote: BTW, CWCO is a foreign utility company. The scenario is quite different from US-based water utilities.

jinbai wrote: I guess water will be booming in the near future, people will need pure and clean water badly as the quality of life is increasing. About two years ago, I remember ion was bought by GE, the stock jumped 100%. I also happened to invest cwco for over a year, with 40% gain, if I kept holding it untill now, it was already over double. Anyway, that is good sector.

**springsnailt** Fri Mar 17, 2006 3:10 pm

CWCO is more of a growth company than a value company. Week USD should also have helped the company's financials. In any case, the market scenario is quite different from what's in the US.

**springsnailt** Fri Mar 17, 2006 8:10 pm

Service region is among the most important variables for the business. This industry is composed of only a few public companies.

• American States Water Company [AWR]: Southern California

• Aqua America, Inc. [WTR]: Pennsylvania (mainly), Ohio, North Carolina, Illinois, Texas, New Jersey, Florida, Indiana, Virginia, Maine, Missouri, New York, and South Carolina

• Artesian Resources Corporation [ARTNA]: Delaware

• California Water Service Group [CWT]: California, Washington, New Mexico, Hawaii

• Middlesex Water Company [MSEX]: New Jersey, Delaware

• Pennichuck Corporation [PNNW]: New Hampshire

• SJW Corp. [SJW]: San Jose and other cities in California's Santa Clara County

• Southwest Water Company [SWWC]: Southern California, New Mexico, and Texas

• The York Water Company [YORW]: York County, Pennsylvania