3 Stocks to Watch From the Thriving Water Supply Industry

The companies under the Zacks Utility - Water Supply industry work around the clock to provide a reliable supply of clean drinking water and efficient sewer services to millions of people across the United States, essential resources for safeguarding public health and sanitation. Typically, water usage declines in the winter months as colder weather reduces outdoor consumption. Conversely, demand rises during the summer, driven by higher temperatures and increased outdoor activities.

The aging of pipelines is concerning, but water utilities continue with their upgrade and maintenance projects to minimize disruptions in operations. American Water Works Company AWK, with its widespread operations, provides services to domestic customers and military bases and offers an excellent opportunity to stay invested in the water utility space. Other water utilities worth adding to your portfolio are Essential Utilities Inc. WTRG and American States Water Company AWR.

About the Utility-Water Supply Industry

The Zacks Utility - Water Supply industry consists of companies that provide drinking water and wastewater services to residential, commercial, industrial and military customers. Water utilities oversee a vast network of nearly 2.2 million miles of aging pipelines. To ensure reliability and expand service, operators continually replace old infrastructure and invest in new pipeline systems. They also manage storage tanks, treatment plants and desalination facilities to meet growing demand. Although highly fragmented, the sector benefits from greater water efficiency across households and industries, promoting sustainable use. As capital-intensive businesses, water utilities gain from lower interest rates, which reduce financing costs and support continued infrastructure investment.

Three Trends Shaping the Future of the Water Supply Industry

Interest Rate Declines Support Long-Term Investment: Water utilities, which rely heavily on debt to finance infrastructure improvements and expansion, are well-positioned to benefit from the latest interest rate cuts. After raising the benchmark rate to 5.25%-5.50%, the Federal Reserve has now reduced it to 3.75%-4.00%. This decline lowers financing costs, giving utilities a favorable environment to pursue large-scale infrastructure projects. With more rate reductions anticipated in 2026, capital servicing expenses are expected to fall further, enhancing the performance of these capital-intensive companies.

Consolidation in a Fragmented Industry: The U.S. water industry remains deeply fragmented, with over 50,000 community water systems and 14,000 wastewater treatment facilities. Many smaller providers operate under financial constraints that hinder infrastructure upgrades, leading to inefficiencies and wastage of potable water. While consolidation through mergers and acquisitions has been slow, it is vital for improving service quality, reducing operating costs and enabling larger-scale infrastructure investments. Increasingly, major players are acquiring smaller systems to modernize operations and extend their service reach.

Aging Infrastructure Requires Investments: The U.S. water and wastewater infrastructure is deteriorating, with water main breaks occurring every few minutes, according to the American Society of Civil Engineers (ASCE). The Environmental Protection Agency estimates that $1.25 trillion in investments will be needed over the next 20 years to maintain and upgrade drinking water, wastewater and stormwater systems. The Bipartisan Infrastructure Law has committed $50 billion toward improving these systems, especially in underserved communities. ASCE currently rates U.S. drinking water infrastructure at C- and wastewater systems at D+, underscoring the urgent need for upgrades. The regulated water utilities are making investments to upgrade and maintain infrastructure. Still, a significant gap exists between the investment made and needed to upgrade the aging infrastructure.

 

Zacks Industry Rank Indicates Bright Prospects

The Zacks Utility Water Supply industry is a 10-stock group within the broader Zacks Utilities sector. The industry currently carries a Zacks Industry Rank #97, which places it in the top 40% of more than 243 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth. The recent earnings estimate of $2.27 for the water supply industry indicates year-over-year growth of 7.1%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation.

 

Water Supply Industry Underperforms Sector and S&P 500

The Zacks Utility Water Supply industry has underperformed the Zacks S&P 500 composite and its sector in the past 12 months. The industry has gained 6.1% compared with the Zacks Utilities sector’s rally of 12.5%. The Zacks S&P 500 composite has advanced 12.4% in the same time frame.

Price Performance (One year)

 

Industry Trading at a Discount to Sector & S&P 500

On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing water utility stocks, the industry is currently trading at 15.89X compared with the S&P 500’s 17.94X and the sector’s trailing 12-month EV/EBITDA of 15.92X.

Over the past five years, the water supply industry has traded as high as 25.69X, as low as 9.21X and at the median of 17.16X.

Water Supply Industry vs. S&P 500 (Past 5 Years)

 

Water Supply Industry vs. Utility Sector (Past 5 Years)

 

3 Water Utility Industry Stocks to Watch Now

We have discussed three stocks from the Zacks Utility- Water Supply industry with strong growth potential, one currently carrying a Zacks Rank #2 (Buy) and the other two having a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American States Water Company: San Dimas, CA-based American States Water, along with its subsidiaries, provides water, wastewater and electric services to its customers. AWR provides long-term water and wastewater services to military bases and continues to pursue new long-term contracts from more military bases. It aims to invest in the range of $180-$210 million in 2025 to upgrade its infrastructure, and it is expected that the company will continue to make fresh investments to upgrade and expand operations.

Over the past 90 days, the Zacks Consensus Estimate for 2025 and 2026 earnings has moved up by nearly 1.2% and 0.3%, respectively. The company’s long-term (three to five years) earnings growth rate is 5.65%. The current dividend yield is 2.75%. It currently has a Zacks Rank #2.

Price and Consensus: AWR

American Water Works Company: Camden, NJ-based American Water, along with its subsidiaries, provides water and wastewater services to millions of Americans. The company continues to expand operations through acquisitions and organic means. American Water Works plans to invest $3.3 billion in 2025 to strengthen and expand its existing infrastructure. AWK aims to invest in the range of $19-$20 billion during the 2026-2030 period.

Over the past 90 days, the Zacks Consensus Estimate for 2025 earnings has moved up by nearly 0.2%. The long-term earnings growth of the company is currently pegged at 6.77%. The current dividend yield of the company is 2.49%. The company delivered an average four-quarter surprise of 2.59%. The company currently has a Zacks Rank #3.

Price and Consensus: AWK

Price and Consensus: WTRG

 

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American Water Works Company, Inc. (AWK): Free Stock Analysis Report
 
American States Water Company (AWR): Free Stock Analysis Report
 
Essential Utilities Inc. (WTRG): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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