Is Aqua America Inc. A Buy At This P/E Multiple?

WTR P/E Valuation Calculation

Note that the selected multiple of 28.1x in the analysis above was determined by averaging Aqua America's current P/E multiple with its peer group.

Understanding the P/E Ratio's Limitations

Before jumping to the conclusion that Aqua America should be added to your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to Aqua America, and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare Aqua America with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

WTR Net Income Growth and Margins vs Peers Table

source: P/E model

Now if the second assumption does not hold true, Aqua America's lower multiple may be because firms in our peer group are being overvalued by the market.

What This Means For Investors

As a shareholder, you may have already conducted fundamental analysis on the stock so its current undervaluation could signal a potential buying opportunity to increase your position in WTR. However, keep in mind the limitations of the P/E ratio when making investment decisions. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Aqua America by taking a look at the following:

Valuation Metrics: how much upside do shares of Aqua America have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company's upside to its peers.

Efficiency Metrics: is management becoming more or less efficient in creating value for the firm? Find out by analyzing the company's return on invested capital ratio here.

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Disclaimer: As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned. I also have no ...

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