Strong Buy on American States Water

On Jan 7, Zacks Investment Research upgraded American States Water Company (AWR) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Consistent performance from this water utility and strong third-quarter results sparked upward earnings estimate revisions. Moreover, this utility delivered positive earnings surprises in the last 4 quarters with an average beat of 22.0%. The long-term expected earnings growth rate for this stock is 2.0%.

The major challenge ahead for water utility operators in the U.S. is the aging water and sewer infrastructure. Water utilities like American States Water Company among others have extensive plans to develop and upgrade their existing assets. The company is on course to spend $255 million over the 2013-2015 time frame.

At the same time the company has been successfully managing its debts, leading to a much reduced interest burden. In the first nine months of 2013, the company successfully curtailed net interest expenses by 2.3% to $17.4 million from $17.8 million incurred in the year-ago period.

Consistent dividend payments since 1931 also make the shares attractive. In Sep 2013, the company completed a 2-for-1 stock split of the common shares while increasing the quarterly dividend payout by 14.1%. The current annual dividend is 81 cents, reflecting a dividend yield of 2.9%.

The present valuation of the company in comparison to its peers also makes the shares attractive. The forward P/E multiple of 19.25% is trading at a marginal discount to its peer group average of 19.28%. Return on Equity of the company is 13.1%, 43.9% higher than the peer group average of 9.1%.

The Zacks Consensus Estimate for 2013 moved higher by 2.8% to $2.66 per share over the last 60 days, as 3 out of 4 estimates were raised. The Zacks Consensus Estimate for 2014 increased 2.1% to $1.43 per share over the same period, as 4 out of 5 estimates moved north.

Other Stocks to Consider

Other players in the water supply industry, which look attractive at current levels, include American Water Works Company Inc. (AWK), Aqua America Inc. (WTR) and Connecticut Water Service Inc. (CTWS). All these stocks carry a Zacks Rank # 2 (Buy).

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