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Water utilities work day in and day out to ensure an uninterrupted supply of clean, potable water and reliable sewer services to millions of customers in the United States. These are essential for healthy and hygienic living.

The aging of pipelines is concerning, but water utilities have continued with their upgrade and maintenance projects to minimize disruptions in operations. American Water Works Company (AWK - Free Report), with its widespread operations, provides services to domestic customers and military bases and offers an excellent opportunity to stay invested in the water utility space.

Other utilities worth retaining in one’s portfolio include American States Water Company (AWR - Free Report), Global Water Resources (GWRS - Free Report), and Consolidated Water Co. Ltd. (CWCO - Free Report).

About the Industry

The Zacks Utility - Water Supply industry includes companies providing drinking water and wastewater services to industrial, commercial, and residential customers, as well as military bases. Water utility operators own nearly 2.2 million miles of pipelines that are getting old. Utilities continuously replace old pipelines and add new ones to expand operations.

Utility operators own storage tanks, treatment plants, and desalination plants to supply uninterrupted potable water to customers. The highly fragmented industry creates operational challenges, but increasing efficient water use by individuals and other industries will ensure that precious water is not wasted.

A large nation like the United States already has a widespread water infrastructure in place, but the proper maintenance of aging infrastructure will become crucial for the supply of potable water to millions of consumers.

3 Trends Pivotal for Shaping the Water Supply Industry's Future

The Fragmented Water Industry Needs Consolidation: Since the US water utility industry is highly fragmented, upgrading aging assets to provide quality services is the need of the hour. Per the American Society of Civil Engineers (ASCE), at present, 50,000 community water systems and 16,000 wastewater treatment systems in the United States are providing water solutions to customers.

Per the ASCE finding, due to the delay in pipeline repairs and maintenance, 6 billion gallons of treated water is lost every day in the United States. The industry creates operational challenges in meeting the requirement for replacement and adding to the aging water and wastewater infrastructure.

Large water utility companies will continue to acquire small players to ensure the extension of high-quality services to customers and the investment required to upgrade old and acquired assets. Water conservation and initiatives taken by large water operators in educating their consumers on the efficient use of appliances and detecting leakage should help to prevent wastage.

Aging Infrastructure Needs Huge Investments: The water and wastewater infrastructure is aging and gradually nearing the end of its effective service life. Per the findings of the ASCE, water main breaks occur every two minutes in the United States due to the aging of the existing water infrastructure. It is evident that this industry needs more investment for maintenance.

Per the US Environmental Protection Agency (EPA), an estimated $896 billion investment is necessary to maintain and expand the drinking water and wastewater service to meet demand over the next 20 years. The massive investment requirement also creates an opportunity for growth among operators in this space.

The Bipartisan Infrastructure Law provided $50 billion to EPA to strengthen the drinking water and wastewater systems of the United States. A major portion of the investment will be directed to upgrading water infrastructure serving disadvantaged communities. ASCE gives a C- rating to the US drinking water infrastructure and a D+ to the US wastewater infrastructure.

The Possibility of Interest Rate Decline is a Tailwind: Utilities, in order to maintain, upgrade, and expand operations, often approach capital markets for loans. The utilities space had been enjoying near-zero interest rates for many years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25%-5.50% range, thus adversely impacting utility operators.

However, the Fed has not increased the benchmark rate since July 2023 and indicated the possibility of rate cuts in 2024. The likely drop in interest rates in 2024 would be a positive for utility operators planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.

The Zacks Industry Rank Indicates Bright Prospects

The Zacks Utility Water Supply industry is a 13-stock group within the broader Zacks Utilities sector. The industry currently carries a Zacks Industry Rank #43, which places it in the top 17% of more than 252 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish prospects for the near-term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation.

The Industry Lags the S&P 500 and the Sector

The Zacks Utility Water Supply industry has underperformed its sector and the Zacks S&P 500 composite in the past 12 months. The industry has lost 13.1%, wider than the Utility sector’s decline of 9.9%. The Zacks S&P 500 composite has gained 26.1% in the same time frame.

One-Year Price Performance

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The Industry's Current Valuation

On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing water utility stocks, the industry has recently been trading at 16.7X compared with the S&P 500’s 15.06X and the sector’s trailing 12-month EV/EBITDA of 14.62X.

Over the past five years, the water supply industry has traded as high as 23.28X, as low as 9.96X, and at the median of 16.18X.

The Water Supply Industry vs. the S&P 500 (Past Five Years)

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The Water Supply Industry vs. the Utility Sector (Past Five Years)

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4 Water Utility Industry Stocks to Buy Now

Below, we have discussed four stocks from the Zacks Utility- Water Supply industry with strong growth potential, as nearly all stocks carry a Zacks Rank #2 (Buy) rating.

American Water Works Company

Camden, NJ-based American Water, along with its subsidiaries, provides water and wastewater services to millions of Americans. The company has continued to expand operations through acquisitions and organic means. American Water Works plans to invest $3.1 billion in 2024 to strengthen and expand its existing infrastructure. The company also aims to invest in the range of $16-17 billion during the 2024-2028 time period.

Over the past 90 days, the Zacks Consensus Estimate for 2024 earnings has moved up by nearly 1%. The long-term (three to five years) earnings growth of the company is currently pegged at 8%. The current dividend yield of the company is 2.39%, better than the Zacks S&P composite’s yield of 1.57%. The company delivered an average four-quarter surprise of 6.1%.

Price and Consensus: AWK

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American States Water Company

San Dimas, CA-based American States Water, along with its subsidiaries, similarly provides water, wastewater, and electric services to customers. American States Water Company is providing long-term water and wastewater services to military bases, and it has continued to pursue new long-term contracts from more military bases. The company aims to invest in the range of $611.4 million during the 2025-2027 time period.

Over the past 90 days, the Zacks Consensus Estimate for 2024 earnings has moved up by 1.7% The long-term earnings growth of the company is currently pegged at 6.3%. The current dividend yield of the company is 2.49%. The company delivered an average surprise of 3.1% in the last four quarters.

Price and Consensus: AWR

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Global Water Resources

This Phoenix, AZ-based company operates and manages 29 water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, AZ. The company’s long-term goal is to become one of the largest investor-owned operators of integrated water and wastewater utilities in areas of the arid western US where water scarcity management is necessary for long-term economic sustainability and growth.

Over the past 90 days, the Zacks Consensus Estimate for 2024 earnings has moved up by 3.3%. The long-term earnings growth rate for the company is currently pegged at 15%. The company's current dividend yield is 2.43%. The company delivered an average surprise of 28.8% in the last four quarters.

Price and Consensus: GWRS

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Consolidated Water Co.

Finally, this Grand Cayman, Cayman Islands-based company, along with its subsidiaries, is involved in the development and operation of seawater desalination plants and water distribution systems. Consolidated Water operates 10 water production plants with a capacity of 24.9 million gallons per day in three countries.

Over the past 90 days, the Zacks Consensus Estimate for 2024 earnings has moved up by nearly 4.9%. The long-term earnings growth rate for the company is currently pegged at 8%. The current dividend yield of the company is 1.56%. The company delivered an average surprise of 61.6% in the last four quarters.

Price and Consensus: CWCO

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