My Top Water Utility Stocks For 2015
Summary In this series of articles, I will be reviewing individual industry sectors and selecting my favorite stock picks for 2015. For Part 53, I will be reviewing the Textiles and Apparel sector, taking a look at revenue/earnings growth and the overall financial stability of the companies. Out of this group of stocks, my top picks are Artesian Resource, California Water Service, and SJW. Overview In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In Part 1 , I reviewed 47 stocks within the Aerospace and Defense industry sector. For part 53 (the final part of this series), in determining my favorite stocks in this sector for 2015, I will review the following Water Utility stocks: American States Water (NYSE: AWR ) American Water Works (NYSE: AWK ) Aqua America (NYSE: WTR ) Artesian Resources (NASDAQ: ARTNA ) California Water Service Group (NYSE: CWT ) Connecticut Water Service (NASDAQ: CTWS ) Consolidated Water (NASDAQ: CWCO ) Middlesex Water (NASDAQ: MSEX ) SJW (NYSE: SJW ) York Water Company (NASDAQ: YORW ) Step 1 The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I planned on removing any stocks from further review because of their negative earnings growth over the past five years; however, none of the stocks had negative earnings growth. Step 2 I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat revenue growth (less than 2%) or a decline in revenue over the past two years. These stocks include: American States Water Aqua America Consolidated Water Step 3 My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1.5 to focus more specifically on fairly valued/undervalued stocks. These stocks included: Step 4 The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here . Fundamental Score Value Score American Water Works 5 9 Artesian Resource 8 10 California Water Service 8 10 Connecticut Water Service 8 7 SJW 9 9 York Water 8 9 To determine the best stocks for 2015, I’m only taking into consideration stocks that have values of 8 or higher for both fundamental and value scores. Doing this left me with the following remaining stocks: Artesian Resource California Water Service SJW York Water Step 5 My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. However, none of the remaining stocks saw a decline in book value during this time period. Step 6 I then looked at the remaining stocks and only included stocks with earnings yields of 5% or higher in my final analysis. The only stock with a yield below this was York Water. Step 7 My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern. Artesian Resource For its last quarter , the company posted a 6% increase in revenue and an increase in earnings per share from $0.23 to $0.28 compared to the same period last year. Artesian continues to pay a high yielding (just over 4%) and slow growing (16% over the past five years) dividend and should continue to reward income investors moving forward. California Water Service For its last quarter , the company posted a 10% increase in revenue and an increase in earnings per share from a loss of $0.11 to a gain of $0.03 compared to the same period last year. The company was able to see these impressive results through a combination of rate increases, sales to new customers, and revenue decoupling mechanisms/balancing accounts. The company will be challenged by the current drought in California, but I believe that the rate case increase that was authorized will help the California Water continue to see impressive quarterly results moving forward. SJW For its last quarter , the company posted a 14% increase in revenue and an increase in earnings per share from $0.04 to $0.23 compared to the same period last year. SJW is facing the same drought issue as California Water, but rate increases and new customers have helped offset the lower customer water usage the company has seen. While the company is sure to see continued low usage rates, I feel that the company’s strong balance sheet and strategic investments will keep the company performing at a high level even during stressful times. Conclusion Out of this group of stocks, my top picks are Artesian Resource, California Water Service, and SJW. While both California Water and SJW are both dealing with a major drought, I believe that both companies have strong enough cash flow and balance sheets to continue to perform well during this time. Looking at the chart below, you can see that all three companies have performed similar so far this year, with all three of them currently down 3.99%-5.44%, while the S&P has been virtually flat. ARTNA data by YCharts When looking at long term returns, you can see that both Artesian and California Water have performed nearly identical with the market in general, while SJW has performed significantly better. ARTNA Total Return Price data by YCharts Currently, SJW is more attractively valued than both Artesian and California Water based on PE trailing ratios, while Artesian is the more attractively priced stock based on forward PE ratios and price to book value. This isn’t the only area in which all three stocks are similar. If you look at the chart below, you can see that both California Water and SJW have increase their book value more than Artesian over the past five years. ARTNA Book Value (Annual) data by YCharts But if you look at a more longer term view, you can see that Artesian has done a significantly better job of increasing book value over the long run. ARTNA Book Value (Annual) data by YCharts With all three stocks maintaining solid overall financial positions, all three stocks offering decent yields with growing dividends, and all three stocks showing fairly consistent and significant increases in revenue, I believe that these stocks are solid options for both short term and long term investors. As always, I suggest individual investors perform their own research before making any investment decisions. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.