NEW YORK (TheStreet) -- The drought in California has made everyone aware of the value of water. The water utility industry, made up of municipally owned and privately owned utilities, have the responsibility of supplying water to households and businesses.
The utility industry is facing serious challenges, however, such as water scarcity, increasing cost of supplying safe and reliable water, financing and building advanced metering infrastructure. Just as important is the challenge of educating the public that it will have to pay more for water.
So what are the best water utilities companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which water utilities companies made the list. And when you're done, be sure to read about which biotech companies to buy now. Year-to-date returns are based on May 29, 2015, closing prices. The highest-rated stock appears last.MSEX data by YCharts
3. Middlesex Water Company (MSEX)
Market Cap: $352.4 million
Year-to-date return: -5.3%
Middlesex Water Company, through its subsidiaries, provides regulated and unregulated water, and wastewater utility services. The company operates in two segments, Regulated and Non-Regulated.
"We rate MIDDLESEX WATER CO (MSEX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its increase in stock price during the past year, growth in earnings per share, increase in net income, revenue growth and good cash flow from operations. We feel its strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
- MIDDLESEX WATER CO has improved earnings per share by 10.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MIDDLESEX WATER CO increased its bottom line by earning $1.14 versus $1.03 in the prior year. This year, the market expects an improvement in earnings ($1.20 versus $1.14).
- The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Water Utilities industry average. The net income increased by 14.7% when compared to the same quarter one year prior, going from $3.17 million to $3.64 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 6.8%. Since the same quarter one year prior, revenues slightly increased by 5.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- Net operating cash flow has increased to $11.43 million or 36.71% when compared to the same quarter last year. In addition, MIDDLESEX WATER CO has also vastly surpassed the industry average cash flow growth rate of -18.30%.
- You can view the full analysis from the report here: MSEX Ratings Report