The Prudent Investor


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.

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