Baird Analysts Talking Water

Analysts at Baird recently took an in-depth look at water utility stocks. Many names in the space have underperformed recently despite reporting strong Q1 earnings numbers, and analysts maintain their overall bullish outlook.

Strong Capex Recovery

Analysts note that spending levels remain high for many water names, but the companies are doing a good job of spending wisely. Upgrading and replacing aging infrastructure has not hurt their bottom lines, as earnings were up 14 percent year-over-year in Q1.

Positive Outlook

Baird expects recent efforts to modernize infrastructure will eventually lead to a long-term investment cycle in water stocks. Analysts are calling for up to 8 percent compound annual earnings per share growth from the sector in coming years.

Q1 Takeaways

Q1 earnings calls in the water space shared several general themes. First, regulatory recovery mechanisms provided a major boost to earnings in Q1. Second, the California water restrictions that have been put in place because of the continuing drought are not expected to have a material effect on the near-term EPS of the sector. Finally, the current regulatory environment is a favorable one for consolidation, and analysts expect M&A activity to pick up, especially for wastewater systems.

Stock Picks

Baird has an Overweight rating on Artesian Resources Corporation ARTNA, American Water Works Company Inc AWK, Connecticut Water Service Inc CTWS, California Water Service Group CWT, Middlesex Water Company MSEX and Aqua America Inc WTR. They have Neutral ratings on American States Water Co AWR, SJW Corp. SJW and York Water Co YORW.