The largest publicly traded water utility in the U.S. should see calmer seas ahead -- and in the meantime its shares look like a bargain to some analysts. By Anne Kates Smith, Senior Editor June 19, 2006 It's like finding a bright, shiny gold piece on a creek bed after the murky water clears. After three months of rough waters, shares in Aqua America are tempting buy recommendations from a couple of research outfits who spot a bargain. Formerly known by the more prosaic moniker Philadelphia Suburban Corp., Aqua America is the largest publicly traded water utility in the U.S. The company, headquartered in Bryn Mawr, Penn., has been around for more than 100 years. Currently, it provides water and wastewater services to 2.5 million residents in 13 states. RELATED STORIES Fund Watch The Best Online Broker Stock Picks From the Pros Analysts at brokerages Hilliard Lyons and AG Edwards on Monday upgraded their opinions of the stock from neutral to buy. Both analysts believe the shares could see $25 within a year. With the stock (symbol WTR) at $22 and yielding 2%, that implies a potential total return of 18%. Aqua is considered the bellwether of its peer group, historically commanding a premium price relative to earnings compared with other water utilities. But since hitting an all-time high in February of nearly $30 a share, the stock has fallen almost 30%, while the median water utility stock has dropped 16% and the SP 500 stock index just 4%. Something called "regulatory lag" -- the time after a utility's costs go up but before it's allowed to raise rates -- has been squeezing earnings and is behind much of the sluggish performance. "Exploit the current weakness in share price while a window exists," exhorts James Lykins, the Hilliard Lyons analyst. The company could post earnings for the first half of 2006 some 9% below the comparable period last year. That's the bad news. The good news is that as a consequence of those below-par earnings, Aqua shares trade at just 25 times the average analyst's 2006 earnings estimate of 85 cents a share -- about the level at which the group overall trades. Analysts, though, think Aqua will once again trade at a premium price-earnings ratio as pending rate hikes help earnings get back on track. Another key driver of Aqua's growth will be an aggressive acquisitions strategy. Aqua could make 25 to 30 deals this year alone. The company recently announced an agreement to buy New York Water Service, with 135,000 customers, for $28 million and the assumption of $23 million in debt. In 2003 and 2004, acquisitions pumped up Aqua's customer base by more than 24% and 11%, respectively. But Aqua pays shareholders handsomely, too. Last summer the company marked its 15th dividend increase in the past 14 years. AG Edwards sees dividend growth of at least 5% annually and roughly 5.5% annual earnings growth over the long term. And here's the kicker: once you own five shares of Aqua, you can purchase more directly from the company with no fees or commissions through the direct stock purchase program. Or you can have your dividends reinvested in company stock, at a 5% discount to prevailing market rates, through the -- in this case aptly named -- DRIP (dividend reinvestment) plan.