The York Water Company (NASDAQ:YORW) shares are down more than -9.88% this year and recently decreased -1.61% or -$0.5 to settle at $30.55. AquaVenture Holdings Limited (NYSE:WAAS), on the other hand, is down -8.38% year to date as of 02/02/2018. It currently trades at $14.22 and has returned -4.50% during the past week.
The York Water Company (NASDAQ:YORW) and AquaVenture Holdings Limited (NYSE:WAAS) are the two most active stocks in the Water Utilities industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect YORW to grow earnings at a 4.90% 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., compared to an EBITDA margin of 15.22% for AquaVenture Holdings Limited (WAAS). YORW’s ROI is 8.80% while WAAS has a ROI of -2.20%. The interpretation is that YORW’s business generates a higher return on investment than WAAS’s.
The value of a stock is simply the present value of its future free cash flows. YORW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.21. Comparatively, WAAS’s free cash flow per share was -0.11. On a percent-of-sales basis, YORW’s free cash flow was -0.01% while WAAS converted -0% of its revenues into cash flow. This means that, for a given level of sales, WAAS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. YORW has a current ratio of 0.90 compared to 5.90 for WAAS. This means that WAAS can more easily cover its most immediate liabilities over the next twelve months. YORW’s debt-to-equity ratio is 0.76 versus a D/E of 0.49 for WAAS. YORW is therefore the more solvent of the two companies, and has lower financial risk.
YORW trades at a forward P/E of 30.55, a P/B of 3.34, and a P/S of 8.30, compared to a P/B of 1.05, and a P/S of 3.32 for WAAS. YORW is the expensive of the two stocks on an earnings, book value and sales basis. 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. YORW is currently priced at a 13.15% to its one-year price target of 27.00. Comparatively, WAAS is -34.17% relative to its price target of 21.60. This suggests that WAAS 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 4.00 for YORW and 1.40 for WAAS, which implies that analysts are more bullish on the outlook for YORW.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. YORW has a short ratio of 7.36 compared to a short interest of 23.47 for WAAS. This implies that the market is currently less bearish on the outlook for YORW.
AquaVenture Holdings Limited (NYSE:WAAS) beats The York Water Company (NASDAQ:YORW) on a total of 10 of the 14 factors compared between the two stocks. WAAS is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, WAAS is the cheaper of the two stocks on an earnings, book value and sales basis, WAAS is more undervalued relative to its price target. Finally, FSNN has better sentiment signals based on short interest.