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Spencer E. Joyce, CFA
Hilliard Lyons
[email protected]

Aqua America (WTR) reported Q4’14 earnings per share from continued operations of $0.28 versus $0.26 in Q4’13. Results met consensus and beat our estimate by a penny. Fiscal Year (FY) 2014 continued-operations EPS grew 4.8% to $1.20. Separately, Aqua America logged a $0.10 per share gain on the sale of Ft. Wayne, Indiana, assets in Q4.

Core revenue/expense results drove the modest Q4 beat to our forecast; the Marcellus pipeline again disappointed, while depreciation and tax rates were slightly higher than anticipated.

Revenue grew 2.3% and 2.4% in Q4 and FY 2014, respectively. Topline fractionally missed our Q4 target, though we believe the combined rate activity plus acquisitions outlook bodes well for 2015.

Operations and maintenance expense grew just 0.5% in Q4, the third straight quarter at or below 1%. FY14 operations and maintenance growth of 1.8% was strong in our view; however, we expect an even better figure in 2015 on the recoup of weather-related spending in Q1’14.

Our 2015 estimated EPS sits unchanged at $1.29. We initiate our 2016 estimated EPS of $1.33. We are reiterating our Buy rating and one-year price target of $30. At our target, shares would trade in line with Aqua’s five-year average price-to-earnings multiple, based on our 2015 estimates. Our methodology is unchanged.

Neil Kalton, CFA
Wells Fargo
[email protected]

Aqua America’s year-end report and call were uneventful and noticeably did not include a CEO succession announcement. We made modest updates to our EPS outlook—our new/old 2015-17 EPS estimates are $1.26/$1.25, $1.33/$1.30 and $1.40/$1.35—ahead of the 10-K filing.

We … highlight Aqua America’s sound fundamentals, including a solid balance sheet, a growing dividend and considerable financial flexibility. Shares trade at modest 5% discounts to “larger cap” regulated water utility peers on our 2015-17 estimated EPS, which we believe, in part, reflects concerns around the CEO succession plan and confusion that an announcement has not been made.

On the call [with equity analysts], Mr. DeBenedictis indicated the board is actively working with outside consultants to ensure a timely transition, and that he would continue to serve as chairman to help ensure a smooth transition. Previously, we have stated a belief that the board will promote from within, given multiple strong internal candidates who would likely be best suited to continue to build on Aqua America’s proven strategy.

However, this seemingly becomes less likely the more time goes by without an announcement. We will be very surprised if an announcement is not made by early May (Aqua America’s Q1 earnings release).

Our ‘15-‘17 EPS estimates are $1.26, $1.33 and $1.40. Primary drivers include timely rate recognition of infrastructure investments (most of Aqua America’s states have infrastructure surcharge mechanisms which minimize regulatory lag), cost controls, modest customer growth and cash flow redeployment.

Customer growth, both organic and acquisition driven, has improved recently, and we expect Aqua America to pursue tuck-in mergers & acquisitions more aggressively now that the portfolio rationalization strategy is complete.

Aqua America has considerable flexibility to redeploy cash through a combination of (1) regulated mergers and acquisitions, (2) dividend growth and (3) share repurchases. Our five-year divided-per-share compound annual growth rate of 9% results in a reasonable approximately 65% payout ratio, consistent with Aqua America’s 60-70% target.

If meaningful attractive growth opportunities do not materialize over the next 12-18 months, we believe the company has the flexibility—given projected free cash flow—to target a higher payout ratio and increase share buybacks while maintaining a consolidated equity ratio closer to 45%.

We consider it essential that Aqua America remains steadfast with its proven regulated strategy, including exercising mergers & acquisitions discipline, and does not stray too far from core competencies when pursuing unregulated growth.

Our $27-$28/share valuation range is based on a price-to-earnings multiple (apply the ‘15 estimated water utility median of 21-23 times our ‘16 estimate of $1.33) and dividend discount model analyses. Risks include regulatory risk and the potential undertaking of dilutive growth ventures. We are attracted to Aqua America’s strong fundamentals—a proven EPS growth strategy, a growing rate base, constructive regulation, efficient operations and financial flexibility.

Richard A. Verdi
Ladenburg Thalman
[email protected]

Since usage can vary favorably or unfavorably in any one quarter, we focus on the company’s long-term growth efforts of infrastructure investment and growth-through acquisitions, both of which are very strong. That said, we view the (sales and earnings forecast) estimate reduction as immaterial to our outlook, our thesis is more than intact, and we continue to see Aqua America as a top long-term investment play on the water space.

On the other hand, Aqua has not exhibited the share price appreciation of its top two comparable companies in the space … Nonetheless, we remain bullish on Aqua America, since we see the lid as a potential long-term opportunity for investors to accumulate shares. [S]ince we believe the two foregoing matters will eventually subside, we see valuation as attractive from a near- and long-term standpoint, and we believe the bottom-line growth rate will uptick year over year from at least 2015 to 2018.


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