The Prudent Investor


A Quick Look at Aqua America
January 8, 2007, 8:33 am
Filed under: Water Utilities

With ten companies to look at, I can make a quick glance at each company each day, finishing up two weeks from now. Some will be tossed in the first round, while the ones that remain will warrant further consideration. This is not going to be a daily blog, but this initial examination can happen rather quickly.

I first look at Aqua America (NYSE:WTR), a $3 Billion market cap company. This is a company I already own in my DRiP portfolio. It more than doubled, so I removed my initial stake and am riding on the profit. Nonetheless, this portfolio is going to be considered completely separate from any other holdings, so I will not be considering redundancy outside of this portfolio.

According to Yahoo Finance, here is a description of the company:

Aqua America, Inc. operates as the holding company for regulated utilities providing water or wastewater services primarily in the United States. It serves residential, commercial, fire protection, industrial, water, wastewater customers, and operating contracts and other customers in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Florida, Indiana, Virginia, Maine, Missouri, New York, and South Carolina. The company also provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to its operating companies’ service territories. As of December 31, 2005, it served approximately 2.5 million people.

With a current price of $22.60, an examination of the company’s valuation shows some positive and negative components. I usually look at the P/E, PEG, and P/S as a quick thumbnail. In this case, those values are 33.4, 3.2, and 5.8. Although these appear to be on the high side, the first two are in line with the industry average; 31.3, 3.4, and 3.6. The P/S, however, is well out of line for what I would like to see. Quarterly revenue growth (year over year) is also in line with the industry average at 7.4% vs. 7.9%. A trailing annual dividend amount of $0.44 translates to a 1.1% yield, which is not significant.

Their debt/equity ratio of 1.2, which is normally higher than I would like to see, but most water utilities have values in this area, so this is not as much of a concern as it would be if I was looking at a different sector. Finally, a look at the 2006 chart shows a significant drop from $28 to $22 earlier in the year, and the price bouncing off the $22 mark during the second half of the year. This could be profit-taking, or it could be due to something else.

This company is the big fish within this area and for that reason alone I am going to allow it to stay to the next round. The smaller the company, the more important some of these numbers become, so when I look deeper into the company I will have a better idea as to how important the elements of concern actually are.

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