James O. Lykins
J.J.B. Hilliard, W.L. Lyons, LLC
We are currently recommending American Water Works (AWK), Aqua America (WTR), Artesian Resources (ARTNA), and California Water Service Group (CWT). Most of the water utilities under our coverage [just] reported fourth quarter results…although this quarter typically makes one of the smallest contributions to overall results due to seasonality.
Picking up where the third quarter left off, rainfall was above normal, occurred on consecutive days, and temperatures have been below average — all negatives for usage.
However, we remain bullish on the group and believe one of the biggest growth drivers in 2010 will be consolidation. With the EPA estimating $335 billion needing to be spent over the next 20 years on water infrastructure and with municipalities continuing to struggle to meet budgets, we think an increasing number of them will seek to monetize assets.
We believe the prime beneficiaries on this front will be WTR and AWK. WTR typically makes about 25-30 acquisitions per year, and with the company making ~200 acquisitions over the past 14 years, this has long been part of the company’s successful growth strategy.
In general, we view valuations among water utilities at present as attractive, and believe the current environment presents an opportunity to buy shares in the group before the seasonal earnings power of the summer begins to be priced into stock prices. Moreover, we note that many in the group will be facing easier comparisons in 2010, given record setting precipitation levels in the Northeast negatively impacting several in that portion of the country. This coupled with the anticipated benefit from pending rate case filings could drive significant EPS growth in 2010.
Neil Kalton, CFA
Wells Fargo Securities
We reiterate our Outperform rating on Public Service Enterprise Group and $33-34 valuation range.
Our ’10 estimate EPS remains $3.15 and we are lowering our ’11-’13 estimate EPS to $3.05, $2.90 & $3.05 from $3.10, $2.95 & $3.10. We view PEG as one of the more attractive Integrated Power Producer/Regulated names given a flat EPS profile, attractively located and diverse generation asset mix and strong regulated growth.