The 8 Best Water Stocks: How To Profit From One Of Life’s Bare Necessities

The three parts of its business are regulated utilities (natural gas, electric, and water), non-regulated renewables (wind, solar, hydro, and thermal), and global infrastructure. Algonquin serves about 770,000 connections across 40 regulated utilities in 13 states and 1 Canadian province. It also has 36 renewable and clean energy facilities that have long-term contracts.

 

Source: Investor Presentation

Algonquin reported its first-quarter results on May 9, 2019. Year over year, revenues fell 3.6% to $477 million, adjusted net earnings fell 33% to $93.8 million, adjusted EBITDA fell 17% to $231.5 million, and adjusted earnings-per-share declined by 41% to $0.19. Adjusting for the one-time income boost that occurred in the first quarter of 2018 due to the U.S. Tax Reform, adjusted EBITDA would have increased by 3% and adjusted earnings-per-share would have declined by 10%.

Acquisitions will add to the company’s customer count and its revenue growth. For example, Algonquin recently acquired Ascendant Group, parent company of Bermuda Electric Light Company, for an equity value of $365 million. Bermuda Electric serves 63,000 residents and businesses in Bermuda.

The company expects the acquisition to be immediately accretive to its 2020 EPS, and the deal was executed at a reasonable valuation of 7.3x the acquired company’s expected 2020 EBITDA. The transaction is expected to close in late 2019. Overall, we expect annual EPS growth of 7.5% for Algonquin through 2024.

Based on 2019 expected EPS of $0.62, the stock has a P/E ratio of 20.8x, above our fair value estimate of 18.0x. A declining valuation multiple could reduce annual returns by 2.9% per year through 2024. Positive EPS growth and its attractive 4.1% dividend yield can serve as an offset, resulting in total expected returns of 8.7% over the next five years. This is a satisfactory rate of return, but the overvalued stock leads us to rate Algonquin as a hold.

Water Stock #4: The Toro Company (TTC)

  • Expected Return: 10.7%

The Toro Company was founded in 1914 as an engine manufacturer, providing power to early tractors. The company quickly shifted focus to mowers, where it continues its focus today. Toro will also benefit from growth in the water industry because the company has a large irrigation business, which represents approximately 16% of annual sales.

In all, Toro generates annual revenue of $2.8 billion. Toro generates approximately 75% of its sales in the United States. It caters heavily to professional customers, which constitute 74% of annual revenue. Toro has generated steady, impressive growth over the past several years.

 

Source: Investor Presentation

Toro reported second-quarter earnings on May 23rd, 2019 and recorded a 9.9% increase in second-quarter sales to $962.0 million, boosted by the acquisition of Charles Machine Works. Adjusted net earnings for the second quarter period fell 2.5% to $1.17 per share, compared with the same quarter last year.

Fortunately, management expects margin improvement over the back half of 2019, as well as improved commodity pricing. The company has also identified margin improvement opportunities associated with their acquisition of Charles Machine Works. Management forecasts adjusted EPS of about $2.90 to $3.00 on revenue of $3.2 billion for 2019.

With expected EPS of $2.95 for 2019, Toro stock trades for a P/E ratio of 24.5x. Our fair value estimate is a P/E ratio of 21.5x, implying the stock is overvalued today. This could negatively impact shareholder returns by approximately 2.6% per year through 2024.

Still, we expect Toro to generate annual EPS growth of 12% per year, more than offsetting an overvalued stock. In addition, the stock has a 1.3% dividend yield, which leads to total expected returns of 10.7% per year over the next five years. Toro is not a high-yield dividend stock, but its impressive growth and nearly 11% expected annual return give the stock a buy recommendation from Sure Dividend.

Water Stock #3: Pentair (PNR)

  • Expected Return: 11.3%

Pentair was a diversified industrial conglomerate. The company recently spun off its Technical Solutions segment and now operates as a pure-play water solutions company that operates in 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies. Pentair was founded in 1966 and trades with a market capitalization of $6.7 billion. Pentair has increased its dividend for 42 consecutive years when adjusted for spin-offs, which makes Pentair a member of the Dividend Aristocrats list.

Pentair recently reported its second-quarter financial results. Net sales rose 2% from the same quarter last year, to $800 million in the most recent quarter. Growth in the Filtration Solutions and Flow Technologies businesses was slightly offset by a decline in the Aquatic Systems segment. A breakdown of Pentair’s financial performance by segment can be seen in the image below.

 

Source: Earnings Slides

Pentair management believes the company can grow EPS by 10% per year over the long-term. We take a slightly more cautious view, with expectations of 6%-7% annual EPS growth through a combination of revenue growth, some margin increases, and share repurchases.

Pentair’s future growth will be fueled by its durable competitive advantages. Specifically, Pentair enjoys a dominant position with a lean, highly efficient structure. Pentair employs a strategy called the Pentair Integrated Management System – or PIMS – which allows its organizational structure to remain lean and encourages efficiency through the company’s supply chain and distribution operations. Pentair is a leader in the niche markets it targets, and through tuck-in acquisitions, Pentair can grow its size and scale further.

Pentair stock has a 2019 P/E ratio of 15.7x, which is below our fair value estimate of 18.0x. An expanding price-to-earnings ratio could boost annual returns by 2.8% per year through 2024. Pentair also has a 2% dividend yield which will contribute to shareholder returns. In all, total returns are expected to reach 11.3% per year over the next five years. We rate Pentair a buy for its high expected returns and its status as a Dividend Aristocrat.

Water Stock #2: A.O. Smith (AOS)

  • Expected Return: 12.0%
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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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