WTRG - Essential Utilities: Shares Remain Expensive After A Q4 Bounce

Summary

• Utilities enter 2023 historically expensive, trading at nearly 20x forward operating earnings estimates.
• Regulated utility stocks attracted buyers last year amid broad market turmoil.
• Essential Utilities features a decent yield, lukewarm price action, and high valuation metrics.

The Utilities sector captured the hearts and cash of risk-averse investors during much of 2022’s broad market volatility. Low-vol stocks generally performed well, but that has reversed to kick off 2023 as high-beta names and last year’s trash has become a new treasure. Will that trend keep up? It’s likely given how expensive defensive sectors have become.

One regulated utility has beaten the market in the last 12 months but features underperformance compared with its peers. I continue to see shares of WTRG as expensive without much bullish price action.

Some 'Safe' Sectors Trade Richly

Utes Giving Back Some Relative Gains So Far in 2023

According to Bank of America Global Research, Essential Utilities (WTRG) is a regulated water/gas providing water or wastewater services to 3 million customers in the states of PA, OH, TX, IL, NC, NJ, IN, and WV, with PA segment being the largest contributor to the NI - along with a natural gas presence through the recently acquired Peoples Gas providing distribution services to 740,000 customers in PA, WV, and KY.

The Pennsylvania-based $12.9 billion market cap Water Utilities industry company within the Utilities sector trades at a high 27.4 trailing 12-month GAAP price-to-earnings ratio and pays a 2.4% dividend yield, according to The Wall Street Journal .

BofA is pessimistic on WTRG with its limited growth outlook while shares were cut to sell by analysts at Wells Fargo in October. Then in November, Essential Utilities reported an earnings and revenue beat – shares drifted higher in the days following the release. Finally, just recently, the management team reaffirmed 2022 earnings guidance while guiding 2023 EPS in line.

On valuation , analysts at BofA see earnings rising at a steady rate as you might expect with a regulated utility. The Bloomberg consensus forecast is about on par with BofA’s take. Dividends, meanwhile, should rise commensurate with EPS growth.

But both the operating and GAAP P/E ratios are very high while WTRG’s EV/EBITDA ratio is nearly twice that of the S&P 500. Overall, with a forward PEG ratio above 4 and a price-to-sales multiple higher than 6, per Seeking Alpha, the stock is simply too pricey.

Essential Utilities: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q4 2022 earnings date of Monday, February 27 before market open with a conference call later that morning. You can listen live here . Before that, shares trade ex-div on Thursday, Feb 9.

Corporate Event Calendar

The Technical Take

Since my last article on WTRG, shares have drifted higher but have not managed to break above noted resistance in the low $50s. What has been interesting to watch unfold, though, is the lower end of the previous trading range. The stock dipped to multi-year lows in October following the Utilities sector's mid-September to mid-October selloff. A swift rebound took place back above the March 2021 low. Still, it’s trendless price action, though shares are up about 14 percentage points on the S&P 500 over the last 52 weeks as investors continue to favor defensive areas.

Overall, I would avoid the stock until it moves into the upper $30s or low $40s where valuations better align with some technical buying prospects.

WTR: Buy in the $30, Sell in the $50s

The Bottom Line

Amid expensive earnings multiples in the Utilities sector, I see some downside risks to the group this year following 2022’s flight to safety. WTRG has a lofty valuation and lukewarm yield while the technicals are not particularly constructive here.

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