Aqua's Profits Aren't Tapped Out
An earnings pause sends the share price down. Is this a buying opportunity?
Dressed sharply in a pinstripe suit and cufflink-studded shirt, Nick DeBenedictis looks the part of the tough, no-nonsense executive. But get him started on the business of purifying and delivering clean tap water, and he's relaxed, forthcoming and remarkably fluent on the subject. You'd think the 61-year-old chief executive of Aqua America was describing a longtime hobby, not the mechanics of running a $3-billion water utility. Says DeBenedictis, a former federal regulator who studied environmental engineering at Pennsylvania's Drexel University: "Being trained in water, how many people actually get to run such a company?"
With operations in 13 states stretching from Maine to Texas, Aqua America is growing rapidly. The Bryn Mawr, Pa., company has expanded by aggressively buying smaller rivals at a rate of 25 to 30 per year for the past five years.
Accompanying that growth has been a steadily ascending share price. Now comes one of those infrequent moments when the stock is backing off its all-time high. If its history is any guide, this is a buying opportunity.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Tighter federal water-quality standards -- which demand the replacement of thousands of miles of leaky water lines and aging filtration plants -- are prompting Aqua to set its sights on still more small outfits that can't afford to upgrade. As of now, Aqua is the largest of a handful of consolidation-minded companies chasing that herd.
To succeed in the water business, you have to spend staggering amounts each year to upgrade plants and equipment. "Bar none, the water industry is the most capital-intensive industry in the country," says DeBenedictis. "The amount you spend for every dollar earned is almost $3." To recoup its investment, Aqua must appeal to state regulators for a boost in the rates it charges customers. This process, which can take several years, is known in the business as regulatory lag.
Aqua America earned 70 cents a share last year, a penny less than in 2005, and regulatory lag is partially to blame. Interest rates also rose at a time when Aqua was carrying a lot of short-term debt, and frequent rainfalls in the North Atlantic states stifled water usage. DeBenedictis expects a spate of rate increases in 2007 and 2008, and he's confident that the company will reach its goals of increasing its customer base by 4% annually, its earnings by 10% and its dividend by 5%.
At $22, Aqua's stock (symbol WTR) is well off its record high of $30 set in early 2006. Yet it still trades at 27 times 2007 profit estimates. That's hardly cheap. Still, if you take the boss at his word that revenues will get back on track in 2007, this could be an excellent entry point for patient investors.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Stock Market Today: Stocks Sell Off Ahead of Fed Decision
Stocks sold off sharply Tuesday as anxiety set in ahead of Wednesday's policy statement from the Federal Reserve.
By Karee Venema Published
-
McDonald's Stock Struggles After Rare Earnings Miss
McDonald's stock is choppy Tuesday after a mixed first-quarter earnings report. Here's what you need to know.
By Joey Solitro Published
-
Stock Market Today: Stocks Sell Off Ahead of Fed Decision
Stocks sold off sharply Tuesday as anxiety set in ahead of Wednesday's policy statement from the Federal Reserve.
By Karee Venema Published
-
Stock Market Today: Markets Post Broad-Based Gains Thanks to Mega-Cap Tech
Stocks get help from a couple of laggard Magnificent 7 stocks.
By Dan Burrows Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Stock Market Today: Stocks Run Out of Steam Ahead of Meta Earnings
The Dow Jones Industrial Average snapped a four-day winning streak after Boeing's first-quarter results.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published