Spencer E. Joyce, CFA
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
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).