Aqua America, Inc. (NYSE:WTR) shares are down more than -9.99% this year and recently decreased -0.62% or -$0.22 to settle at $35.31. Cadiz Inc. (NASDAQ:CDZI), on the other hand, is up 2.46% year to date as of 02/02/2018. It currently trades at $14.60 and has returned 2.10% during the past week.
Aqua America, Inc. (NYSE:WTR) and Cadiz Inc. (NASDAQ:CDZI) are the two most active stocks in the Water Utilities industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect WTR to grow earnings at a 5.00% annual rate over the next 5 years.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Aqua America, Inc. (WTR) has an EBITDA margin of 58.94%. This suggests that WTR underlying business is more profitable WTR’s ROI is 8.10% while CDZI has a ROI of -18.90%. The interpretation is that WTR’s business generates a higher return on investment than CDZI’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. WTR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.23. Comparatively, CDZI’s free cash flow per share was -0.15. On a percent-of-sales basis, WTR’s free cash flow was -0% while CDZI converted -0.83% of its revenues into cash flow. This means that, for a given level of sales, WTR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. WTR has a current ratio of 0.50 compared to 1.80 for CDZI. This means that CDZI can more easily cover its most immediate liabilities over the next twelve months.
WTR trades at a forward P/E of 24.55, a P/B of 3.24, and a P/S of 7.86, compared to a forward P/E of 365.00, and a P/S of 838.04 for CDZI. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. WTR is currently priced at a -9.62% to its one-year price target of 39.07. Comparatively, CDZI is -16.57% relative to its price target of 17.50. This suggests that CDZI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for WTR and 2.00 for CDZI, which implies that analysts are more bullish on the outlook for WTR.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. WTR has a beta of 0.45 and CDZI’s beta is 0.47. WTR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. WTR has a short ratio of 11.15 compared to a short interest of 30.74 for CDZI. This implies that the market is currently less bearish on the outlook for WTR.
Aqua America, Inc. (NYSE:WTR) beats Cadiz Inc. (NASDAQ:CDZI) on a total of 8 of the 14 factors compared between the two stocks. WTR is growing fastly, is more profitable, generates a higher return on investment and has a higher cash conversion rate. In terms of valuation, WTR is the cheaper of the two stocks on an earnings and sales basis, Finally, WTR has better sentiment signals based on short interest.