Is Aqua America Destined for Greatness?http://www.fool.com/investing/general/2012/10/02/is-aqua-america-destined-for-greatness.aspx Alex Planes
October 2, 2012
Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Aqua America's (NYSE: WTR ) recent results tell us about its potential for future gains.
What the numbers tell you
Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Aqua America's free cash flow has grown in comparison to its net income.
A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Aqua America's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.
Is Aqua America managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.
Healthy dividends are always welcome, so we'll make sure that Aqua America's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.
By the numbers
Source: YCharts. * Period begins at end of Q2 2009.
Source: YCharts. * Period begins at end of Q2 2009. NM = not material due to negative free cash flow.
How we got here and where we're going
Aqua America's attracted a lot of investor interest recently, which helped push its past-year performance close to that of sector leader American Water Works (NYSE: AWK ) . Aqua America's superior net margins have been a big part of that appeal, as has its consistent earnings growth. American Water Works has greater scale, but size isn't everything, as Veoli