California Water Branch (CWT) Purchases Driftwood Valley Water Assets – November 24, 2022


California Water Utility Group (CWT Free Report) recently announced that its subsidiary, Washington Water Service (Washington Water), has acquired the water system assets of Driftwood Valley Association. This acquisition will add 62 customers to Washington Water’s existing customer base. Washington Water also plans to provide service to new association customers as its 21 empty lots are developed.

The company will continue to invest in local water infrastructure to increase the resilience of the entire operation and provide high quality services to current and future customers.

A fragmented industry needs consolidation

According to the Environmental Protection Agency, currently more than 51,000 community water systems and 16,000 community wastewater systems in the United States provide water solutions to customers. Due to a large number of small operators in the industry and lack of adequate funds, essential infrastructure upgrades and repairs are sometimes delayed.

According to the findings of the American Society of Civil Engineers, water main breaks occur every two minutes in the United States due to the aging of existing water infrastructure. Pipe breaks result in the waste of 6 billion gallons of potable water every day and add to the losses of water utility operators. Aging and lack of timely maintenance are major contributors to pipeline ruptures.

The acquisition of smaller units by larger utilities ensures the necessary investments for infrastructure upgrades and the continuation of high quality services for customers.

Public services continue to consolidate

California Water Service expands its business through strategic acquisitions. In October 2022, CWT received approval to acquire the wastewater system assets of Keauhou Community Services, Inc. The buyout is expected to close in the first quarter of 2023 and add 1,500 customers. That same month, Washington Water received approval to acquire the assets of Stroh’s Water Company, which will add an additional 900 customers to closing by the first quarter of 2023.

Other water services like American hydraulic works (AWK free report), SJW Group (SJW free report) and Essential utilities (WTRG Free Report) are expanding their business through systematic acquisitions.

American Water Works continues to focus on acquiring utilities that provide service to 5,000 to 50,000 customers. Through nine acquisitions completed in four states, it added 79,300 customers to its base. AWK’s ongoing acquisitions (as of September 30, 2022), when completed, will add an additional 21,600 customers to its base.

The Zacks consensus estimate for American Water Works earnings in 2022 suggests 4.9% year-over-year growth. The company’s current dividend yield is 1.77%. The company currently has a Zacks rank of #3 (Hold).

SJW Group completed over 25 acquisitions during the period 2010-2021 and expanded its operations. In January 2022, it completed the acquisition of Texas Country Water in Comal, TX. The agreement added more than 1,900 water and wastewater customers to the existing customer base. This is the fourth Texas acquisition by SJW Group in the past 12 months. Over the next five years, the company plans to invest $1.5 billion to further strengthen its infrastructure.

The Zacks consensus estimate for SJW Group earnings in 2022 and 2023 implies year-over-year growth of 15.7% and 6.8%, respectively. He currently has a Zacks rank of No. 3.

In the six years ended December 31, 2021, Essential Utilities expanded its utility business by completing numerous water and wastewater acquisitions, which in turn added 94,000 customers. In the first quarter of 2022, the company completed a takeover, which added 11,000 customers. Essential Utilities plans to invest $3 billion from 2022 to 2024 to strengthen its operations and effectively serve expanding customers.

Long-term (three to five years) earnings growth for Essential Utilities is currently pegged at 6.2%. The Zacks consensus estimate for WTRG earnings in 2022 and 2023 implies year-over-year growth of 6.6% and 6.5%, respectively. He currently has a Zacks rank of No. 3.

Price performance

CWT shares have gained 20.4% in the past six months from industry7.2% rally.

Image source: Zacks Investment Research

Zacks Rank

California Water Service currently has a #3 Zacks rank. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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