As water shortage continues to spark tensions worldwide, the water industry is expected to witness robust demand. However, the current economic uncertainties present a set of challenges for the industry.
So, while investors could consider quality water stock Consolidated Water Co. Ltd. (CWCO), I think it might be wise to avoid Cadiz Inc. (CDZI) and Ocean Power Technologies, Inc. (OPTT), given their grim fundamentals.
Amidst global uncertainty, the water industry is witnessing favorable conditions boosting investment and participation. This is due to the essential nature of water, as it is something humans cannot live without.
Moreover, the water industry growth is influenced by the escalating issue of water scarcity and the depletion of groundwater levels worldwide. As water resources become more limited, the demand for efficient water management solutions and technologies rises, creating opportunities for the industry to expand.
The global water treatment systems market is anticipated to grow at a CAGR of 8.8% from 2022 to 2030.
However, Fitch’s Sector Outlook for the U.S. water and sewer utilities industry is currently described as ‘Deteriorating' due to a combination of factors, including rising inflation and a slowing U.S. economy.
Economists at Fitch predict a mild recession around mid-2023. This outlook suggests that the water and sewer utilities sector will face another year of challenges in terms of costs and capital.
Senior Director and U.S. Water and Sewer Sector Head Audra Dickinson said, “General inflationary pressures, notably higher chemical, labor, and power costs, and weaker economic growth are likely to weaken financial performance for water and sewer utilities.”
Stock to Buy:
Consolidated Water Co. Ltd. (CWCO)
Headquartered in Grand Cayman, the Cayman Islands, CWCO designs, constructs, manages, and operates water production and water treatment plants primarily in the Cayman Islands, the Bahamas, and the United States. The company operates through four segments: Retail; Bulk; Services; and Manufacturing.
CWCO’s forward EV/Sales multiple of 2.46 is 34.5% lower than the industry average of 3.75. Its trailing-12-month PEG multiple of 0.30 is 64% lower than the industry average of 0.83.
On June 6, 2023, CWCO announced its indirect subsidiary, Kalaeloa Desalco LLC, had signed a definitive agreement with the Honolulu Board of Water Supply (BWS) to design, build, operate, and maintain a seawater reverse osmosis desalination plant.
The company expects revenue generated over the approximate 24-year base term of the contract to total about $204 million in current dollars.
On May 30, 2023, CWCO declared a quarterly cash dividend of $0.085 per share, payable on July 31, 2023.
CWCO pays an annual dividend of $0.34, which translates to a yield of 1.45% at the current market price. Its four-year average dividend yield is 2.54%.
During the fiscal first quarter that ended March 31, 2023, CWCO’s revenues increased 68.1% year-over-year to $32.87 million. Its gross profit grew 47.8% from its year-ago quarter to $10.56 million. The company’s net income attributable to CWCO came in at $3.81 million or $0.24 per share, up 122.1% and 118.2% year-over-year.
Street expects CWCO’s revenue to rise 46% year-over-year to $30.75 million in the current fiscal quarter ending June 2023. Its EPS is estimated to increase 33.3% year-over-year to $0.20 in the current quarter. The stock has an impressive earnings surprise history, surpassing its consensus revenue estimates in each of the trailing four quarters.
Over the past year, the stock has gained 78.8%, closing the last trading session at $24. It has gained 58.5% year-to-date.
CWCO’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It also has an A grade for Sentiment and a B for Momentum, Growth, and Value. Within the 13-stock Water industry, it is ranked first.
To access the additional CWCO ratings for Stability, Sentiment, and Quality, click here.
Stocks to Sell:
Cadiz Inc. (CDZI)
CDZI provides water solutions in the United States. It operates through Land and Water Resources; and Water Treatment Business segments. It offers clean water solutions, and water storage, conveyance, and treatment solutions.
CDZI’s forward EV/Sales and P/S of 101.87x and 91.15x are significantly higher than the industry averages of 3.75x and 2.06x, respectively.
During the fiscal first quarter that ended March 31, 2023, CDZI’s revenue declined 8.5% year-over-year to $130 thousand. Its operating loss rose 9.7% from the prior-year quarter to 4.15 million, while operating expenses increased 9% year-over-year to $4.28 million.
Moreover, the company’s net loss and comprehensive loss applicable to common stock rose 66.6% year-over-year to $11.96 million.
Analysts expect CDZI’s EPS to be negative $0.06 for the fiscal second quarter ending June 2023. The company has failed to surpass consensus EPS estimates in each of the trailing four quarters, which is disappointing.
The stock has tumbled 12.5% over the past month to close the last trading session at $4.05.
CDZI’s bleak prospect is reflected in the POWR Ratings system. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
The stock also has an F grade for Value and a D for Growth, Sentiment, and Quality. It is ranked #12 within the same industry.
Click here to see the POWR Ratings of CDZI (Momentum and Stability).
Ocean Power Technologies, Inc. (OPTT)
OPTT develops and commercializes proprietary systems that generate electricity by harnessing the renewable energy of ocean waves in North America, South America, Europe, and Asia. It offers the PB3 PowerBuoy system that generates power for the power grid in offshore locations.
OPTT’s trailing-12-month Price/Sales of 13.93x is 917.3% higher than the industry average of 1.37x.
During the fiscal third quarter that ended January 31, 2023, OPTT’s operating loss rose 28.5% year-over-year to $7.06 million. Its net loss and net loss per share increased 11.3% and 10% year-over-year to $6.09 million and $0.11.
Moreover, the company’s combined cash, unrestricted cash, cash equivalents, and short-term investments as of January 31, 2023, were $41.1 million, compared to $57.7 million at the beginning of the year.
The stock has plunged 36.9% over the past nine months to close the last trading session at $0.61.
It’s no surprise that OPTT has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
The stock also has an F grade for Value and Quality and a D for Growth and Sentiment. It is ranked last within the same industry.
Beyond the POWR Ratings stated above, one can access OPTT’s grades for Momentum and Stability here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
CWCO shares were unchanged in premarket trading Thursday. Year-to-date, CWCO has gained 63.06%, versus a 14.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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