Summary
The water supply sector has been affected by the pandemic, but since it is an essential service, it should not take long to recover.
Since the almost 50% drop in the stock price due to the COVID-19 outbreak, the stock has been consolidating in the same range, showing a slow uptrend.
Water supply systems have a huge demand right now in the United States for maintenance and upgrades.
The company’s financials show stability and low-risk investment for the long term.
RainStar/E+ via Getty Images Before the big drop in its stock price in March 2020, Essential Utilities’ (NYSE: WTRG ) share price was in a strong uptrend with no signs of weaknesses and no concerns for investors. The recovery from the drop has been slower than the overall market, however, still being almost 20% off of its highs. The water sector plays the biggest part in Essential Utilities’ business model; despite its importance as an essential service, the effects the pandemic has imposed on the sector have been quite significant. Looking forward, there is still hope that the company can continue to recover past its pre-pandemic high.
Despite its slow recovery from the huge pandemic drop, I cover below why Essential Utilities may be a low-risk long-term investment. Overview & The Water Distribution Sector
Essential Utilities is a large publicly-traded water and natural gas provider in the United States. Around five million people rely on the company’s services in ten different states. While utility companies tend to have stable and predictable financials in terms of both revenue and expenses, there are a few large-scale expenditures that one must consider when analyzing them.
The biggest challenge the company will face in the next few years is the repair and replacement of old and degenerated water pipes. Today, the United States has over one million miles of underground pipe, and a lot of those are nearly 100 years old and in need of maintenance. Old and inadequate pipes are the main reason for leaks and bursts in the water distribution system, causing a tremendous loss of efficiency in the networks. It is believed that around 15% of water is lost in the system before it is able to get to customers. According to the American Water Works Association, It should cost water companies over $1 trillion to expand and maintain the water service so it can meet the demands in the next twenty years. Essential Utilities has their work cut out for them, and this will not be an easy task. While expensive, there is a significant upside in terms of potential growth and recognition for their work in the industry; despite the big challenge, that means that the company will certainly have work demand for the next few years and, being one of the biggest companies of the sector, has plenty of conditions to keep growing and providing value to its investors.
Prior to COVID-19, the biggest concerns for companies in the water supply sector were global warming leading to more severe inundations and droughts, challenges to the structure and resilience of water supply systems, and increases in the population living in areas of water stress. As is the case with the great majority of industries, the water distribution industry was significantly affected by the COVID-19 pandemic uncertainties. It has intensified the prior problems and also brought some new ones. For that reason, investments in the water distribution industry slowed down all over the world.
The prime example of these new problems is with the government restrictions and lockdowns causing industrial demand to suffer a big hit. Those large users of water have drastically reduced their activities, impacting directly water distribution companies such as Essential Utilities. Even more revenue was lost over the last year due to other technology companies, chemical suppliers, and contractors, all of whom were large consumers who have since scaled back operations, thus adversely affecting Essential Utilities’ bottom line.
Despite the negative effects of the crisis, the COVID-19 pandemic has brought to everyone’s attention the importance of a good water distribution system. It is expected that the government focuses on this sector along with projects, both of which will drive demand for water and improve the prospects for utility companies as a whole. Another point of relevance to stand out from the competition is the investment in automation of tasks in water distribution systems. Companies that have systems capable of remotely controlling and operating their networks can perform better during crisis periods by quickly being able to respond to occurrences […]
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