Mr. Winter: The water utility group is among the least economically sensitive groups or sectors in the market. The bulk of retail sales and revenues are from residential customers who do not experience the economical swings in volume that the industrial or commercial classes do. Water utility bills are low enough that typical residential customers do not change consumption patterns. Roughly 3%-10% of retail revenues are derived from the industrial sector, where volumes sold are directly related to the economy. While industrial water sales have declined, we emphasize that a 10% consumption decline from the industrial customer class, which totals only 5% of retail revenues, doesn't impact the bottom line significantly. So yes, this is probably the most economically resilient group out there.
TWST: Has that resulted in the stocks holding up in this market?
Mr. Winter: There are only 10-12 publicly traded water utilities and the average
year-to-date decline is 21%. However, most water utilities did not experience
the significant declines in the fourth quarter of 2008. In addition, the largest
four water utilities have performed very well year to date. California Water
Service (CWT) is up 8%; American Water Works (AWK) is down 15%; American States
Water (AWR) is down 7%; Aqua America (WTR) is down 8%. The group continues to
trade at healthy multiples of roughly 17 times forward earnings, which, while at
the lower end of their historical 15-year range, is still well above both market
multiples and utility sector multiples. The electric utilities historically
traded in a range of 10 to 17 times forward numbers for the past 15 years, but
currently trade 9 times forward numbers, and that's after a little bit of a
positive bounce. So yes, the stocks have held up as one would expect.
Tickers included in this excerpt: AWK, AWR, CWT, RWEOY, WTR
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