The Prudent Investor


Another Look At California Water Service Group
January 29, 2007, 10:36 am
Filed under: Water Utilities

California Water Service Group’s website can be found at www.calwatergroup.com. As a Webmaster, I can tell you (although this is simply common sense) that a company places the item they feel is most important for you to know above the fold on the home page. The largest text on this page states, “California Water Service Group has paid a dividend every year since 1945, steadily increasing dividend payments every year since 1967.” Indeed, that is impressive and comforting. Additionally comforting is the fact that they have a direct link on their home page to their dividend reinvestment program (DRiP). If you are unclear as to what this is, then I will simply state that this allows for the purchase of partial shares, and allows for dividends to be reinvested as shares, for little or no cost. I have not looked at the details of their DRiP, but at this point I am going to make the assumption that it is fee-free. If you wish to learn about DRiPs then I would encourage you to go to DRiPInvesting.org, where you will find not only more information than you can digest, but also a community willing to help you along. DRiPs are common with utility stocks in general, and if the selected company offers a DRiP then that will be the preferred method of purchase.

It is easy to find their 10-Q filing, and it is available as a Word document, Excel document (although the management’s discussion is missing within this form, and that is an essential element), and PDF. I personally do not like PDF because it is not very friendly when reading on the screen (its strength is its ability to print). The important thing here is that the information is accessible.

Email alerts are available as a means of keeping current with changing information about the company. This is a nice touch and very helpful, as I do not want to have to look for news of the company on a regular basis. The ability to remain informed is important, and whatever the company can do to help me in this regard is certainly a feather in their cap.

I listened to their latest (November) conference call and a few things were gleamed from it that may not be obvious. They were quite proud of their response during the earthquake in Hawaii, which is something to note. Companies doing the right thing at critical times mitigate litigation that may come against them, and fosters good will amongst their constituents. Also, they noted the probability (which came to pass) that the Governor of California would be reelected, and explained why this would be a fortunate circumstance for them.

During this pass I found nothing negative with California Water Service Group and they remain a strong contender for consideration.



The Four Survivors
January 26, 2007, 8:01 am
Filed under: Water Utilities

With a couple of passes through the water utilities, it is time to look back at what remains. The following are the companies we will be examining going forward.

California Water Service Group (CWT)

SJW Corp. (SJW)

American States Water Co. (AWR)

Middlesex Water Co. (MSEX)

Comparison chart

Here is a comparison of the companies over the past three years. The chart is a little misleading because it does not include dividends paid – the apparent laggard in the group, according to this chart, offers a comfortable 3.6% dividend.

So whereas this blog has been daily from the start, it is time to slow things down and look more in depth at each company. In addition to examining the things one would normally expect, I am going to evaluate some intangibles, like availability of information through their website, and response by their Investor Relations Department. In my time investing, I have found that a lack of information results in the greatest amount of anxiety, so quick and easy access to the information I need is an issue.

After examining all four companies, it will be time to toss any that do not measure up, and determine which company will be selected, which could come down to a guess in the timing of a purchase.



Dropping Consideration of Southwest Water Co.
January 25, 2007, 8:21 am
Filed under: Water Utilities

I have been looking over the numbers for the remaining water utilities and my eyes keep going back to Southwest Water Co.’s P/E of 38.9. In and of itself, the P/E is not necessarily a great number on which to base a decision, but it is so far out of line with the others (31.3, 28.6, 32.1, 28.5, and 22) that I decided to see if there was anything that would give me comfort with that number. Unfortunately, I found only the opposite.

VectorVest has a service that allows one to enter a ticker and have the current statistics evaluated. SWWC’s share price has dropped about 75 cents to $12.79, so the numbers should be a little better than when I first started looking at the companies. Nonetheless, VectorVest offers a value of the stock’s worth of only $5.93, which is grossly overvalued. I looked at the other companies still in the group and all of them are at least close to their perceived values.

I then looked at the Relative Value, which is an indicator of long-term price appreciation potential. SWWC has an RV of 0.61, which is poor on a scale of 0.00 to 2.00 – the others all had relative values close to 1.

Finally, I looked at the Earnings Growth Rate, which reflects a company’s one to three year forecasted earnings growth rate in percent per year. SWWC has a forecasted Earnings Growth Rate of -3.00%. VectorVest reasonably favors stocks whose GRT is rising and is greater than the sum of current inflation and interest rates, which is currently 7.90%. All of the other companies passed this hurdle.

So what would be the comfort of holding the high P/E company? I am unable to offer an answer to that question, so I have decided to remove Southwest Water Co. from consideration.



Dropping Consideration of Artesian Resources
January 24, 2007, 8:07 am
Filed under: Water Utilities

At this point I am going to drop one more company, Artesian Resources.

Artesian Resources could well be an excellent choice, as I do know others who like this company. A positives here is its low (for a water utility) Price/Sales ratio of 2.4. You will remember that yesterday I removed Aqua America from the list because of its high P/S. Another positive would have to be its nice dividend yield of 3.4%, again I tossed the previous company for a weakness in this area.

However, when I note that the company’s stock price has just barely advanced over the previous two years, the dividend yield alone is not enough to keep me interested.

The real concern comes with two points that cannot be ignored. The first is that the revenue growth of 4% is only about half that of the industry. Since this is a growth area, I believe that the company I select needs to at least get close to performing as well as the industry as a whole.

Of grave concern is their debt/equity ratio of 1.7. This is simply too high for a company of its size, and it’s size being a market capitalization of only $115 Million gives me no comfort.

So with the removal of Artesian Resources, I have five companies remaining, namely Connecticut Water Service, SJW Corp, American States Water. Southwest Water, and Middlesex Water, as ordered by market capitalization.



Dropping Consideration of Aqua America
January 23, 2007, 8:01 am
Filed under: Water Utilities

It’s time to narrow things down even more, and at this point I’m going to drop Aqua America, an excellent company to own, and as previously stated, one I currently have in my DRiP portfolio.

There is a lot of good to say about WTR, and it would still be a fine selection for anyone looking to invest in water utilities. The company continues to surge forward with numerous acquisitions every year, and its geographical diversity will help shield it from weather-related difficulties.

That said, the company’s current Price/Sales ratio of 5.8 is just too hard to ignore. I read James P. O’Shaughnessy’s book, “What Works on Wall Street,” and consider its findings to be something that I simply cannot ignore, and P/S is arguably the most important single valuation one can examine. Personally, I have been burned when I have disregarded this number, so it is painful experience that I need to help guide me to the right company.

The only thing that would give me comfort in this area would be the cushion of nice dividend, and with WTR only yielding 1.1%, I cannot bring myself to consider it for a purchase.

I do understand that the low dividend yield has much to do with the fact that this utility is a growth company, thus the need to retain cash for acquisitions, but for the purposes of this particular portfolio I feel that a smaller company will have a better chance to benefit, if only for the fact that it could become a takeover target.

So with this post I drop consideration of Aqua America, which in another portfolio would be a fine choice.



A Quick Look at Artesian Resources
January 22, 2007, 7:59 am
Filed under: Water Utilities

The last company on the list is Artesian Resources (NASDAQ:ARTNA), with a market cap of $117 Million.

Yahoo Finance offers the following description:

Artesian Resources Corporation, through its subsidiaries, engages in the distribution and sale of water to residential, commercial, industrial, governmental, municipal, and utility customers in the state of Delaware. It also provides water for public and private fire protection to customers in its service territories, as well as offers wastewater services. As of December 31, 2005, the company had 107 operating and 62 monitoring wells in its systems, as well as owned and maintained approximately 1,000 miles of water main throughout the state. It also had approximately 72,400 metered customers and served a population of approximately 239,000 residents, as of above date.

With a current price of $18.71, the company exhibits a comparitively excellent P/E of 19.2. The PEG of 2.9 is the second best in the comparison group, as is its P/S of 2.4. Quarterly Revenue Growth is a major nagative at only 4%, and the other major negative is the D/E at 1.7. Countering these is an excellent Dividend Yield of 3.4%.

The 2006 chart shows the price start just below $20, spiking quickly up to $22, then falling and bouncing between $18.50 and $19.50.

This is a hard call since the numbers are both positive and negative. I believe that these warrant further examination, so the company will be held for now for further consideration.

Looking forward, I will reexamine the companies that are left in the consideration field. There are some numbers that concern me, and I will look again to decide whether I am fretting over something unessential, or if the company should be tossed because of my discomfort.



A Quick Look at Basin Water
January 19, 2007, 7:59 am
Filed under: Water Utilities

The penultimate company in our comparison is Basin Water (NASDAQ:BWTR), with a market cap of $125 Million.

Yahoo Finance offers the following description:

Basin Water, Inc. engages in the design, building, and implementation of groundwater treatment systems in the United States. It offers a proprietary ion-exchange wellhead treatment system that reduces groundwater contaminant levels. The system could be used to treat a range of contaminants, including arsenic, nitrate, and perchlorate. The company markets its systems through direct sales representatives and third-party sales representatives, as well as through strategic relationships to utilities, cities, municipalities, special districts, real estate developers, and other organizations that supply water.

With a current price of $6.65, Yahoo Finance cannot offer a P/E or PEG. Its P/S of 7.2, the highest in thr group, and 1% Revenue Growth, the second lowest in the group, allow us to stop the examination here and toss the company for consideration to the next round.