On Thursday, Jefferies adjusted its stance on Essential Utilities, Inc. (NYSE:WTRG), moving the rating from Buy to Hold and lowering the price target to $41 from $44. The firm cited a slowdown in long-term water segment growth as the primary reason for the downgrade.
Essential Utilities reported a solid third quarter, which met the analyst's initial expectations, including a reinstated earnings per share compound annual growth rate (EPS CAGR) of 5-7% and a positive outcome from the Aqua PA rate case settlement.
Despite these positive notes, the water segment's rate base was revised downward to 6% from 8%, partly due to limited visibility on DELCORA and a delayed East Whiteland deal. This revision, which affects about 66% of the total rate base, led to a new projection of the total rate base CAGR through 2029 at 7.9%, compared to the previous 8.2% through 2028, excluding DELCORA. This figure is slightly higher than the consensus of 7.4%.
The updated estimates for EPS CAGR from 2024 to 2028 are now at 6.4%, a decrease from the prior 6.8%, yet still above the consensus of 6.3%. For the period from 2025 to 2029, the EPS CAGR is anticipated to be 5.6%, which is below the Street's expectation of 5.8%. Additionally, equity financing projections were weaker than anticipated, with new guidance suggesting accumulative equity financing of $350 million between 2024 and 2025.
The firm now predicts that Essential Utilities will reach Moody's (NYSE:MCO) 12% funds from operations (FFO) to debt downgrade threshold by 2026, which is a year later than previously forecasted but in line with management's goal to address Moody's negative outlook that year. Following a successful re-rating of the stock, the analyst believes there is now less appeal for investors in this non-electric, hybrid gas/water utility company.
In other recent news, Essential Utilities Inc. reported a solid financial performance for the third quarter of 2024, surpassing earnings per share (EPS) expectations with a reported EPS of $0.25. The company's Q3 revenues increased by 6% to $435.3 million, primarily driven by rate adjustments and increased sales. Essential Utilities also announced significant investments of $932.5 million in infrastructure projects, with plans to invest between $1.3 and $1.4 billion in 2024.
Recent regulatory developments have been favorable for Essential Utilities, with the approval of a Pennsylvania gas rate case expected to increase annual revenue by $93 million. Moreover, the company anticipates a further $73 million revenue increase from a pending Pennsylvania water rate case settlement. Despite challenges posed by Hurricane Helene, the company demonstrated resilience with a swift recovery of operations in North Carolina.
Key analyst notes reveal that Essential Utilities projects a compounded annual growth rate of 5% to 7% in EPS through 2027, excluding DELCORA contributions. The company is also aiming to raise $350 million in equity between 2024 and 2025 to support its growth.
InvestingPro Insights
Essential Utilities' financial profile, as revealed by InvestingPro data, offers additional context to Jefferies' downgrade. The company's P/E Ratio (Adjusted) of 22.6 and PEG Ratio of 1.99 suggest that the stock may be trading at a premium relative to its earnings growth, aligning with the InvestingPro Tip that WTRG is "Trading at a high P/E ratio relative to near-term earnings growth."
Despite the downgrade, Essential Utilities maintains a strong dividend profile. The company boasts a dividend yield of 3.23% and has raised its dividend for an impressive 32 consecutive years, according to an InvestingPro Tip. This consistent dividend growth may provide some stability for investors in light of the revised growth projections.
The company's revenue growth has been mixed, with a 5.84% quarterly increase in Q3 2024, but a 13.98% decline over the last twelve months. This variability in revenue performance could be contributing to the analyst's concerns about long-term water segment growth.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for Essential Utilities, providing a deeper understanding of the company's financial health and market position.
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