How High Will Aqua America Fly?

Shares of Aqua America (NYSE: WTR  ) hit a 52-week high yesterday. Let's look at how the company got there to find out whether clear skies remain on the horizon.

How it got here
Let's face it: Utilities don't make big moves all too often. Aqua America's no different, and until the past week its stock had been essentially flat for the past year. Over the past five trading days, however, Aqua America gained more than it had in the year prior. It wasn't great earnings, as growth was very subtle -- and those earnings were released a month ago. So what could have happened? Well, let's start with an incessant stream of bad news from Europe and end with more American economic weakness.

Defensive stocks do well in downturns, and it's hard to get more defensive than a water utility. Aqua America's done fairly well over the past year, beating most in its moribund peer group. Only American Water Works (NYSE: AWK  ) has done better domestically, but even a flat year would be better than the misery faced by shareholders in French utility conglomerate Veolia Environment (NYSE: VE  ) :

WTR Total Return Price Chart

WTR Total Return Price data by YCharts

Location matters, but it also doesn't help Veolia to be more diversified and more spread out than its American peers. Are these defensive stalwarts still good buys as the market starts to crack? Let's find out.

What you need to know
Aqua America stands out from its peers primarily for a higher net margin and for consistent growth, which has been fueled in recent years by a series of minor acquisitions. However, it's very much in line with the valuation ranges of others (with the exception of Veolia, currently in the red):

Company

P/E Ratio

3-Year Annualized Earnings Growth

Net Margin (TTM)

Aqua America 22.5 10.8% 21%
American Water Works 19.0 NM 12.1%
Veolia Environment NM NM (1.7%)
Middlesex Water (Nasdaq: MSEX  ) 23.6 8.3% 12.4%
California Water Service (NYSE: CWT  ) 20.6 (3.8%) 6.9%

Source: Yahoo! Finance. NM = not material because of negative earnings.

Middlesex and California Water are much smaller than Aqua America, but their gains over the three-year period correspond very closely to earnings growth:

WTR Total Return Price Chart

WTR Total Return Price data by YCharts

Why has American Water Works grown more? Well, its 2009 earnings were negative, as they had been since 2005. The past two years have brought that company its most profitable stretch ever, hence the industry-beating growth. Since these utilities have maintained stable valuations for some time, it stands to reason that the market will respond only to earnings, whether they happen to be strong or weak. Aqua America will need to keep growing its service area through acquisitions to become more than a steady defensive dividend -- but steady defense is a lot better than losing your shirt.

What's next?
Where does Aqua America go from here? That seems to depend almost entirely on the company's ability to keep adding customers through acquisitions. I can't see the stock suffering any real decline -- no one will stop using water. The Motley Fool's CAPS community has given Aqua America a four-star rating, with all but 30 of more than 500 investors predicting continued outperformance. I'm one of them. I made a CAPScall on Aqua America last August, and I'll be hanging onto it.

Interested in tracking this stock as it continues on its path? Add Aqua America to your Watchlist now for all the news we Fools can find, delivered to your inbox as it happens. If you're looking for other dividend stalwarts that might offer even greater returns, take a look at The Motley Fool's most popular free report on nine rock-solid dividend stocks. Secure your future today: Get the free info you need.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights. The Motley Fool owns shares of California Water Service Group. Motley Fool newsletter services have recommended buying shares of Veolia Environnement, Aqua America, and California Water Service Group. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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