Rating Update: Stock Rating C-Neutral (9/30/19)-York Water Co (YORW).

out_logo_500#19463.jpg

BUSINESS

The York Water Company impounds, purifies, and distributes drinking water. It also owns and operates three wastewater collection systems and two wastewater treatment systems; and two reservoirs, including Lake Williams and Lake Redman, which together hold up to approximately 2.2 billion gallons of water. In addition, the company has a 15-mile pipeline from the Susquehanna River to Lake Redman; and owns seven wells that supply approximately 366,000 gallons of water per day to its customers in Carroll Valley Borough and Cumberland Township, Adams County. It serves customers in 39 municipalities within York County and 9 municipalities within Adams County, Pennsylvania. The company serves various customers in the fixture and furniture, electrical machinery, food product, paper, ordnance unit, textile product, air conditioning system, laundry detergent, barbell, and motorcycle industries.
out_plist#19463.jpg

INVESTMENT RATING

out_map1#19463.jpg

YORW is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

York Water has a current Value Trend Rating of C (Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. York Water has a very low Appreciation Score of 12 but a good Power Rating of 83, producing the Neutral Value Trend Rating.

York Water’s stock is selling significantly above targeted value. The current stock price of $43.66 compares to targeted value 12 months forward of $22.
York Water’s very low appreciation potential results in an appreciation score of 12 (88% of the universe has greater appreciation potential.)
out_pt#19463.jpg

York Water has a Power Rating of 83. (This good Power Rating indicates that YORW has a better chance of achieving attractive investment performance over the near to intermediate term than all but 17% of companies in the universe.)
Factors contributing to this good Power Rating include: is in an extremely strong phase current; and recent price action has been favorable.

INVESTMENT PROFILE

York Water’s financial strength is average. Financial strength rating is 52.
out_pfit1#19463.jpg

Relative to the S&P 500 Composite, York Water Co has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that YORW is normal risk. Low earnings variability is a positive for York Water. Relative weaknesses include: low forecasted profitability, low financial strength, and low expected growth. York Water’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. YORW has unusually low market capitalization.

CURRENT SIGNALS

York Water’s current operations are stable. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

York Water’s current technical position is very strong. The stock price is in a 19.1 month up move. The stock has appreciated 55.2% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Important negative changes in The York Water Co (NASDAQ: YORW) investment behavior have recently occurred: the stock fell on very heavy volume.
Recent small positive changes in fundamentals have benefitted The York Water Co (NASDAQ: YORW): the stock’s power rating rose above 70.
The stock is currently rated C.
The York Water Co (NASDAQ: YORW) stock enjoyed a major increase of 10.1% on 9/30/19. The shares closed at $42.88. Moreover, trading volume in this advance was exceptionally high at 450% of normal. The stock has been strong relative to the market over the last nine months and has risen 5.8% during the last week.

CASH FLOW

In 2018, York Water experienced no change in cash of $0.00 million (). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$29.53 million. Non-operating uses consumed -$1.14 million (-4% of EBITDA). Cash taxes consumed -$0.28 million (-1% of EBITDA). Re-investment in the business amounted to -$19.22 million (-65% of EBITDA). On a net basis, debt investors pulled out -$2.29 million (-8% of EBITDA) while equity investors withdrew -$6.59 million (-22% of EBITDA).
out_cflow.1#19463.jpg

York Water’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the York Water Co (the) Peer Group as well. In most years, York Water was in the third quartile. Currently, York Water is slightly below median at -4% of EBITDA (-$1.14 million).

York Water’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the York Water Co (the) Peer Group. In most years, York Water was in the third quartile and lower quartile. Currently, York Water is substantially below median at -1% of EBITDA (-$0.28 million).

York Water’s Business Re-investment, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the York Water Co (the) Peer Group. In most years, York Water was in the second quartile and top quartile. Currently, York Water is above median at -65% of EBITDA (-$19.22 million).

York Water’s Debt Investors, %EBITDA has experienced a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the York Water Co (the) Peer Group. In most years, York Water was in the third quartile and lower quartile. Currently, York Water is below median at -8% of EBITDA (-$2.29 million).

York Water’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the York Water Co (the) Peer Group. In most years, York Water was in the third quartile and second quartile. Currently, York Water is slightly above median at -22% of EBITDA (-$6.59 million).

York Water’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the York Water Co (the) Peer Group. In most years, York Water was in the second quartile and lower quartile. Currently, York Water is slightly above median at 0% of EBITDA ( $0.00 million).
out_cflow.2#19463.jpg

York Water’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the York Water Co (the) Peer Group. (Since 2016 Cash, %Revenue has experienced a very sharp decline.) In most years, York Water was in the second quartile and lower quartile. Currently, York Water is lower quartile at 0%.

PROFITABILITY

York Water’s return on equity reached a new post-2009 low in 2019.
This was due to small negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of York Water’s assets remained stable over the full period 2009-2019: asset turnover has exhibited little to no overall change.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
out_dpgrfs3#19463.jpg

York Water’s return on equity is at the upper quartile (10.8%) for the four quarters ended June, 2019.
out_dpgrfs3.2#19463.jpg
Operating performance (pretax return on assets) is upper quartile (4.8%) reflecting asset turnover that is substantially above median (0.14X) and at median pretax margin (33.7%).
Tax “keep” rate (income tax management) is lower quartile (83.8%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is below median (2.73X).

GROWTH RATES

There are no significant differences between York Water’s longer term growth and growth in recent years.
York Water’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 2.8% per year.

Total asset growth has been 3.3% per year.

Annual E.P.S. growth has been 5.5% per year.

Equity growth has been 3.8% per year.
No consensus growth rate forecast is available for York Water.
out_growthgrf#19463.jpg

Relative to the York Water Co (the) Peer Group, York Water’s historical growth measures are erratic. Revenue growth (2.8%) has been at median. E.P.S. growth (5.5%) has been below median. Equity growth (3.8%) has been at the lower quartile. Total asset growth (3.3%) has been lower quartile.

Consensus growth forecast is unavailable.
out_growthgrf.2#19463.jpg

PRICE HISTORY

Over the full time period, York Water’s stock price performance has been good. Between November, 2008 and September, 2019, York Water’s stock price rose +288%; relative to the market, this was a +17% gain. Significant price move during the period: 1) May, 2010 – April, 2015: +93%.
out_price#19463.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of 46.4% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of 46.4% is upper quartile relative to York Water Co (The) Peer Group.

Current 5-year total return performance of 19.4% is upper quartile relative to the S&P 500 Composite.
Through September, 2019, with upper quartile current 5-year total return of 19.4% relative to S&P 500 Composite, York Water’s total return performance is at the upper quartile relative to York Water Co (The) Peer Group.
out_quartret#19463.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, YORW’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/equity ratio is above median. The lowest factor, the ratio of enterprise value/assets, is above median.

Relative to York Water Co (The) Peer Group, YORW’s overall valuation is quite high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/earnings ratio is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. The lowest factor, the ratio of enterprise value/revenue, is above median.
out_tradv#19463.jpg

York Water has a minor value gap compared to the median. For YORW to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 13.35X to 12.73X. If YORW’s ratio of enterprise value/revenue were to fall to 12.73X, its stock price would be lower by $-2 to $41.
For YORW to achieve upper quartile valuation relative to the York Water Co (The) Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 13.35X to 14.44X. If YORW’s ratio of enterprise value/revenue were to rise to 14.44X, its stock price would increase by $4 from the current level of $44.

VALUE TARGETS

YORW is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
York Water’s current Price Target of $22 represents a -50% change from the current price of $43.66.
York Water’s very low appreciation potential results in an appreciation score of 12 (88% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 12, the high Power Rating of 83 results in an Value Trend Rating of C.
out_vc#19463.jpg

York Water’s current Price Target is $22 (+10% from the 2018 Target of $20 but -50% from the 09/30/19 price of $43.66). This slight rise in the Target is the result of a +4% increase in the equity base and a +6% increase in the price/equity multiple. The forecasted increase in growth has a large positive impact on the price/equity multiple and the forecasted increase in return on equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
out_wc.1#19463.jpg
out_wc.2#19463.jpg

PTR’s return on equity forecast is 10.3% — in line with our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is steady at the 2010 low of 10%.

PTR’s growth forecast is 5.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2013 low of 3%.

PTR’s cost of equity forecast is 6.5% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is steady at the 2010 peak of 6.2%.
out_vc.2#19463.jpg
At York Water’s current price of $43.66, investors are placing a positive value of $22 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 10.1% versus a cost of equity of 6.1%.
PTR’s 2020 Price Target of $22 is based on these forecasts and reflects an estimated value of existing assets of $27 and a value of future investments of $-5.

About John Lafferty 77056 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.