Essential Utilities: Making Progress on Simplification Strategy; Among Cheapest Utilities

We reaffirm our $42 per share fair value estimate for Essential Utilities WTRG after several moves in the last month that give us confidence management is executing its strategic plan to simplify the business and position it for continued growth. We reaffirm our narrow moat rating.

Essential’s stock is down about 30% year to date, underperforming the utilities sector and swinging from one of the most overvalued utilities in our coverage at the beginning of the year to one of the cheapest in our coverage now. The key moves recently include closing the sale of its West Virginia natural gas distribution business for $37 million and agreeing to sell three of its unregulated energy projects for $165 million.

Management also completed its planned $300 million equity issuance last month at a price we estimate was about 10% below our fair value estimate. Despite the depressed price, we estimate the deal proceeds and new equity should cover most of Essential’s equity needs for 2024, a positive given the continued stock price decline.

We think investors’ biggest concern should be the slowdown in municipal water system acquisitions. Essential recently agreed to buy the Greenville, Pennsylvania, water system for $18 million, adding to the $45 million worth of deals closed during the first half of the year. However, this year’s total deal value is well below the $200 million of ongoing annual acquisitions we assume in our 6% annual long-term earnings growth forecast. Slower acquisition growth puts more pressure on Essential to get regulatory support for its planned $1 billion of annual organic capital expenditures.

We expect Essential’s full-year earnings will be at the low end of management’s $1.85-$1.90 per share guidance range unless operating cost controls offset the $0.08 first-quarter weather headwind at the gas business. We expect the company to show year-over-year growth in the third quarter when it reports earnings Nov. 7.