For the nine months to Sept. 30, profit rose more than 25% to $163.7 million, or 90 cents per share, from $130 million, or 68 cents. However, the results benefited from a big tax drop and were complicated by the removal of discontinued operations.
The share-price decline represents an opportunity to get into a traditional "buy and hold" quality stock at a relatively cheap price, says Martin Leclerc, a money manager at Barrack Yard Advisors who's been buying the stock lately for clients. It has not only the safety aspects of a utility but also some growth potential that many peers don't have, he adds.
The company provides an essential service, and should benefit from some lasting growth trends, such as the continuing move by budget-constrained U.S. cities to cut costs by privatizing their water-delivery systems. Roughly 85% of water customers in the U.S. get their water from municipalities, so there's plenty of business to pick up there.
An additional growth leg for the Bryn Mawr, Penn., concern could come from the shale-gas revolution. New technologies such as fracking and horizontal drilling require tons of water. Through the construction of water pipelines, Aqua America is expanding in this nonregulated business in central Pennsylvania, part of the hot Marcellus Shale natural-gas play.
As is typical of the sector, Aqua America's profits are partly determined by regulators, and, depending on the municipality concerned, the company usually is allowed a 10% to 13% return on equity for the regulated parts of its business. It also has been raising earnings in recent years by purchasing smaller water systems around the country.
There are a limited number of publicly traded water utilities and Aqua America is the second biggest, after American Water Works (AWK), whose return on equity is about half of Aqua America's mid-double-digit percentage ROE.
The stock drop has brought Aqua America's 2014 price/earnings ratio to 19.5 times. That's not wildly cheap on an absolute basis, but it's a discount to its long-term median P/E of 23. Aqua America's P/E is also at a much lower premium to that of the S&P 500 than has been the case historically.
Aqua America sports a 10-year record of compounding its net income by 10% a year, and its dividend by 8%. It currently yields 2.6%.