4 Stocks to Watch From the Thriving Water Supply Industry

The Zacks Utility - Water Supply industry, currently ranked in the top 19% of Zacks industries, faces challenges from aging infrastructure requiring an estimated $1.25 trillion investment over the next 20 years, though is supported by falling interest rates and consolidation trends. Despite underperforming the S&P 500 and its sector in the past year, the industry is trading at a discount based on EV/EBITDA. Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), Artesian Resources (ARTNA), Middlesex Water Company (MSEX) and American Water Works Company (AWK) are highlighted as stocks with strong growth potential, with planned infrastructure investments and positive earnings estimate revisions.

Analysis

The Zacks Utility - Water Supply industry, currently ranked in the top 19% of over 244 Zacks industries (Zacks Industry Rank #46), faces substantial capital requirements due to aging infrastructure. The American Society of Civil Engineers (ASCE) rates U.S. drinking water infrastructure at C- and wastewater systems at D+, highlighting the urgent need for an estimated $1.25 trillion in investments over the next two decades to maintain and expand services. However, the sector is poised to benefit from several key tailwinds. The Federal Reserve's recent reduction of the benchmark interest rate by 100 basis points to 4.25%-4.50%, with further easing anticipated in the second half of 2025, is expected to lower capital servicing expenses for these capital-intensive businesses. Additionally, consolidation within the fragmented U.S. water industry, which includes over 50,000 community water systems, is a critical, albeit slow, trend enabling larger entities to fund necessary upgrades, further supported by initiatives like the $50 billion commitment from the Bipartisan Infrastructure Law.

Despite the industry's 11.1% gain over the past year, it has underperformed both the S&P 500 (which advanced 11.4%) and the broader utility sector (up 11.6%). Nevertheless, the water supply industry currently trades at a significant valuation discount, with an enterprise value to EBITDA (EV/EBITDA) multiple of 11.27X. This compares favorably to the S&P 500’s 16.85X and the utility sector’s 15.09X, and is substantially below the industry's five-year median EV/EBITDA of 17.20X. This attractive valuation, combined with a positive earnings outlook indicated by the Zacks Industry Rank and optimistic aggregate analyst revisions, suggests bullish near-term prospects. Specific companies are undertaking significant capital programs: American Water Works (AWK) plans $3.3 billion in 2025 investments and $17-19 billion for 2025-2029, with its 2025 consensus earnings estimate up 6.14%; Companhia de Saneamento Basico (SBS) aims to invest $10.6 billion from 2024-2029, seeing its 2025 earnings estimate rise 7.9%; and Artesian Resources (ARTNA) plans $46.4 million in 2025 investments, with an 8% upward revision in its 2025 earnings estimate. The overall sentiment for the industry, as per provided signals, is "strongly positive" with a sentiment score of 0.75.

Key Decisions for Investors

• Consider allocating capital to the water utility sector, given its current EV/EBITDA valuation of 11.27X which is at a discount to its historical median (17.20X) and broader market multiples, alongside a positive earnings outlook and the tailwind from falling interest rates.
• Focus on specific utilities with strong growth catalysts, such as Companhia de Saneamento Basico (SBS) and Artesian Resources (ARTNA), both Zacks Rank #1, due to their significant planned investments ($10.6B and $46.4M respectively) and positive 2025 earnings estimate revisions (up 7.9% and 8% respectively).
• Monitor the Federal Reserve's interest rate policy closely, as further rate reductions anticipated in H2 2025 are expected to lower capital costs and improve profitability for these capital-intensive businesses undertaking large-scale infrastructure projects.
• Adopt a long-term investment horizon, recognizing that the substantial infrastructure upgrades required (estimated $1.25 trillion over 20 years) and benefits from industry consolidation will materialize over time, potentially offering sustained growth opportunities.