Goldman Sachs Names 2 'Relatively Defensive' Water Utility Plays

Water utility stocks are trading at a premium valuation to electric and gas utilities, which seems justified given their longer depreciable life and visibility into above-average growth due to significant water pipe investment needs, according to Goldman Sachs.

The American Water Works, Essential Utilities Analyst

Insoo Kim said in a Wednesday note that water utilities have abundant growth opportunities in a fragmented market and their premium valuation appears sustainable, with continued environmental, social and governance momentum.

American Water Works: Best-In-Class Growth

Kim upgraded American Water Works Company Inc (NYSE: AWK) from Neutral to Buy and raised the price target from $134 to $146.

The company has been generating best-in-class earnings growth of 8.3% and should continue to deliver above-average growth in the long term due to organic investments and municipal system acquisitions, the analyst said. 

American Water Works is the only large-cap, pure-play water utility and has an ESG-friendly status, he said.

Tthe company has a stable balance sheet, which should continue to improve through 2022, according to Goldman Sachs. 

Essential Utilities: A Water-Gas Mix

The Goldman Sachs analyst initiated coverage of Essential Utilities Inc (NYSE: WTRG) with a Neutral rating and $45 price target. 

The company, which was formed by the merger of Aqua America and Peoples Gas, is likely to generate robust 6.6% earnings growth annually from 2019 to 2022, Kim said.

The stock valuation already reflects these positives, the analyst said. 

Both American Water Works and Essential Utilities “remain relatively defensive in the current COVID-19 environment,” he said. 

AWK, WTRG Price Action

American Water Works shares were trading 1.99% higher at $131.78 at the time of publication Thursday, while Essential Utilities shares were up 1.67% at $42.70. 

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