Jefferies starts Essential Utilities shares with Buy on robust earnings

On Monday, Essential Utilities, Inc. (NYSE:WTRG) received a new Buy rating from Jefferies, accompanied by a price target of $44.00. The firm forecasts a robust earnings growth for the utility company, projecting a 7% compound annual growth rate (CAGR) in earnings per share (EPS) from 2024 to 2028. This estimate surpasses the consensus of 6.2% and aligns with the upper end of the company's historical 5-7% guidance range.

The anticipated growth in EPS is supported by an expected rate base increase of 8.5-9.0%, which is slightly offset by an approximate 2.5 percentage point equity dilution and around 0.3 percentage point from parent interest expenses. However, a significant 90 percentage point improvement in return on equity (ROE) is expected to counterbalance these factors.

The optimism from Jefferies is partly influenced by the recent positive outcome of a gas rate case in Pennsylvania, which the firm believes sets a precedent for an upcoming water rate case in the state. A favorable settlement in the water case is anticipated to be reached soon, which could further bolster Essential Utilities' financial performance.

The $44.00 price target implies an 18% total shareholder return (TSR), indicating the potential for a strong investment return for shareholders based on the current market conditions and company projections. Essential Utilities, Inc. operates regulated utilities, providing water, wastewater, and natural gas services.

In other recent news, Essential Utilities Inc. reported a mixed second-quarter, with earnings per share (EPS) at $0.28, and announced plans to issue $250 million of equity through its At-The-Market (ATM) program this year.

BofA Securities resumed coverage on Essential Utilities, bestowing a Buy rating and setting a price target of $45.00, citing the stock's potential for a 17% upside and its attractive position in the water utility sector. Essential Utilities entered into agreements that could result in the sale of its common stock worth up to $1 billion.

The company's board approved a 6% dividend increase, marking the 33rd consecutive year of dividend growth. Essential Utilities is set to invest between $1.3 billion to $1.4 billion in infrastructure improvements this year. The company expects to recover approximately $100 million from PFOS contamination lawsuits.

Operating revenues were impacted by lower natural gas commodity prices and warmer weather, while expenses rose due to one-time factors and operating costs from newly acquired systems. These are the recent developments in the company's operations.

InvestingPro Insights

Essential Utilities' strong financial position and growth prospects are further supported by recent data from InvestingPro. The company's market capitalization stands at $10.41 billion, reflecting its significant presence in the utility sector. With a P/E ratio of 18.61, Essential Utilities is trading at a valuation that may be considered reasonable given its growth prospects.

InvestingPro Tips highlight the company's impressive dividend history, having raised its dividend for 31 consecutive years and maintained payments for 54 years. This track record aligns well with Jefferies' positive outlook on the company's earnings growth potential. The current dividend yield of 3.4% offers an attractive income stream for investors, complementing the potential for capital appreciation suggested by the analyst's price target.

The company's profitability is underscored by its robust gross profit margin of 58.66% and operating income margin of 35.63% for the last twelve months as of Q2 2024. These figures indicate Essential Utilities' ability to maintain strong operational efficiency, which is crucial for sustaining the projected earnings growth.

It's worth noting that InvestingPro offers 7 additional tips for Essential Utilities, providing investors with a more comprehensive analysis of the company's financial health and market position. These insights can be particularly valuable when considering the long-term investment potential highlighted in the Jefferies report.

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