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Shares of the water utility Aqua America (NYSE: WTR) rose 7% in October. In addition to information about the company's dividend, investors took kindly to the stock after learning of two analyst upgrades.
After raising the price target on Aqua America's shares from $35 to $40, analysts at Wells Fargo Securities upgraded their rating from market perform to outperform, according to benzinga.com. In part, analysts based their outlook on the belief that Aqua America's rate increase request in Pennsylvania will resolve favorably for the company. Aqua America intends to file an infrastructure charge in 2017 followed by a rate case filing in 2018.
Although it provides water and wastewater services to approximately 3 million customers in eight states, Aqua America primarily relies on its operations in Pennsylvania. Favorable outcomes of rate increase requests in the Keystone State, therefore, are crucial to the company's success. In fiscal 2016, for example, Aqua Pennsylvania, the company's largest subsidiary, accounted for approximately 52% of Aqua America's operating revenue and 74% of its net income.
But the dealings in Pennsylvania weren't the only source of optimism. Further inspiring investors, the analysts from Wells Fargo said that their current earnings estimates for Aqua America assume only $50 million in deals for 2018 and beyond. Meanwhile, the company has more than $120 million in deals pending, leading the analysts to assert that there's potential for their outlook to grow even more bullish if the company executes on its growth plan.
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Besides Wells Fargo, Ladenburg Thalmann also shared a bullish outlook on the stock in October. Maintaining a buy rating, the analysts set a $32 price target on Aqua America's shares.
The October wave of positive sentiment for the stock, in and of itself, may have motivated investors to pick up shares, but it could also very well be the cumulative effect of optimism that has stretched throughout the year. In March, the stock was subject to two upgrades. Barclays raised it from equal weight to overweight and upwardly revised the stock's price target from $33 to $36. Boenning and Scattergood, likewise, upgraded the stock, rating it outperform instead of neutral.
When analysts turn their attention to a stock, investors should certainly pay attention, but it should always be taken with a grain of salt. After all, these bearish or bullish ratings may be predicated on the company's predicted short-term performance -- whether several months or a couple of years. We, however, maintain long-term time horizons and are much more concerned with the fundamentals. In this regard, Aqua America represents an interesting opportunity. Operating as a regulated utility, the company has steady and predictable cash flow. Moreover, it has a clear growth-through-acquisition strategy. It's for reasons like these that it should attract investors' attention, not the opinions of those on Wall Street.
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