From the October 2010 issue of Research Magazine • Subscribe!

Water: Refreshing Opportunities

A long, hot summer demonstrates the investment potential of water companies.

SAM Sustainable Asset Management
Zurich, Switzerland
www.sam-group.com

The global water market continues to experience above-average growth rates, with the overall size of the global water market estimated at U.S. $480 billion for this year and an expected annual growth rate of 6.2 percent over the next five years. Companies that offer innovative products and solutions along the entire water value chain will profit from this trend, creating attractive investment opportunities for investors with long-term horizons.

Water consumption has noticeably augmented over the past few decades. In the mid-20th century, annual global water consumption stood at 1,480 billion cubic meters. By 2000, this figure had already risen to 3,840 billion cubic meters, and the past two years saw an increase to 4,500 billion cubic meters.

SAM expects this trend to continue. Assuming no countermeasures are taken, SAM's analyses indicate that water consumption will reach about 6,500 billion cubic meters by 2030, resulting in a significant supply shortage.

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Heike M. Doerr
Janney Capital Markets
hdoerr@janney.com
215-665-4448

American States Water (AWR) shares trade at roughly 16 times our 2011 estimate, below some mid-cap water utility peers, such as Aqua America (WTR) (18 times) and in line with the company's closest peer in our view, California Water Service Group (CWT) (also 16 times).

Boasting a 3 percent dividend yield and a strong growth outlook into 2011, we believe AWR shares continue to offer investors a compelling long-term total return opportunity on a risk-adjusted basis. Our $45 fair value estimate reflects a multiple of 20 times our 2011 estimate. We maintain our Buy rating for shares of AWR.

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Michael Gaugler
Brean Murray Carret & Co.
gauglerm@bmur.com
212-702-6539

American Water Works' (AWK) 2Q10 results were much better than expected. Both revenues of $671million and EPS of $0.42 were well ahead of our and consensus estimates. On the strength of 2Q10 results, the company raised its annual EPS guidance to $1.42-$1.52 on a strong outlook for 2010.

We've raised our forward forecasts to reflect improving fundamentals, and we maintain our Buy rating but are raising our target price to $31 from $28, based on the shares attaining a level of 20 times our 2011 EPS estimate of $1.59.

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Andrew Smith
J.P.Morgan
andrew.l.smith@jpmorgan.com
713-216-7681

Higher guidance and management comments indicating no near-term equity needed in combination with lower capex expectations should boost the stock. American Water Works (AWK) increased its 2010 EPS guidance to $1.42-1.52 from $1.33-1.40. The company cited not only better revenue from rate relief and positive results year-to-date, [but also] favorable hot, dry weather at the end of 2Q10.

We expect the favorable weather trend to have continued through July based on comments about favorable weather from the other utilities we cover. The company also indicated that strong results eliminate the needs for any imminent equity.

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Ryan M. Connors
Janney Capital Markets
rconnors@janney.com
215-665-1359

Aqua America (WTR) continues to show why it is a "best-of-breed" player in the investor-owned utility space. The company is spending over $1.5 billion in capital over the next five years to rehabilitate system infrastructure, to grow its rate base and to set the stage for future growth.

Rate relief will favorably impact results in the near-term and a pipeline of planned cases offers support in 2011 and 2012. WTR shares trade at a well-deserved premium to the peer group, but we believe the combination of steady growth and a consistently rising dividend will enable the company to deliver compelling risk-adjusted total returns for long-term investors. We reiterate our Buy rating for WTR and increase our fair value to $21 from $20.

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