The fears of an economic slowdown, triggered by the financial system failures and the macroeconomic headwinds, resulted in a volatile market recently. Moreover, the water industry, considered extremely crucial for public health, the environment, and the economy, is not out of the grasp of the macro headwinds.
Given this backdrop, let us probe into some water stocks, Middlesex Water Company (MSEX), Cadiz Inc. (CDZI), and Ocean Power Technologies, Inc. (OPTT), which might be best avoided for reasons mentioned in the article.
The banking sector turmoil and the plethora of economic headwinds have stoked fears of an economic downturn. Consequently, the market volatilities are anticipated to hover for quite some time. The water industry is not left out of its grasp.
Water being the most valuable natural resource, is crucial for not just the sustenance of life on earth but also at the core of socio-economic development, a healthy ecosystem, and sustainable development. Water is used by all industries and individuals. Hence, the role of the water industry is extremely crucial.
Strong headwinds related to general inflationary pressures, notably higher chemical, labor and power costs, and weaker economic growth, are expected to contribute to the weaker financial performance of the industry.
The largely spread water system of the United States is considered pivotal to the nation’s economy. However, it is grappling with challenges of underinvestment, growing demand amid rising population, aging infrastructure, and unfavorable climatic conditions. As the nation’s infrastructure has been aging, experts anticipate that safety and affordability issues have been soaring simultaneously.
In addition, Senior Director and U.S. Water and Sewer Sector Head Audra Dickinson said, “Increasingly worsening extreme weather events will continue to be a threat to the sector as utilities work to expand and improve resiliency of water supply and contend with unforeseen expenses that can arise in the aftermath of severe weather events.”
Water companies using new technologies for water infrastructure, testing equipment, and wastewater treatment are anticipated to be top choices compared to traditional infrastructure and service companies.
Against this backdrop, fundamentally weak water stocks, MSEX, CDZI, and OPTT, could be avoided now.
Middlesex Water Company (MSEX)
MSEX owns and operates regulated water utility and wastewater systems in New Jersey and Delaware. It operates in two segments - Regulated and Non-Regulated.
MSEX’s forward EV/Sales and Price/Sales of 9.53x and 7.54x are 144.2% and 240.8% higher than the industry averages of 3.90x and 2.21x, respectively.
MSEX’s trailing-12-month asset turnover ratio of 0.16x is 34.5% lower than the industry average of 0.24x.
For the fiscal year that ended December 31, 2022, MSEX’s total operating expenses came in at $120.33 million, up 9.5% year-over-year. Its earnings applicable to common stock came in at $42.31 million, while its earnings per share of common stock came in at $2.39.
Furthermore, its total current liabilities came in at $117.86 million for the year that ended December 31, 2022, compared to $56.62 million for the year that ended December 31, 2021.
Analysts expect MSEX’s EPS to be $0.61 for the fiscal second quarter ending June 2023. Its revenue is expected to be $45.25 million for the same quarter. It failed to surpass the consensus EPS in each of the trailing four quarters.
The stock has declined 23.8% over the past year and 3.3% over the past three months to close its last trading session at $78.85.
MSEX’s POWR Ratings reflect a bleak outlook. The stock has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MSEX is also graded a D in Value and Sentiment. It is ranked #12 out of 14 stocks in the D-rated Water industry.
In addition to the POWR Ratings we’ve stated above, MSEX’s ratings for Momentum, Growth, Stability, and Quality can be seen here.
Cadiz Inc. (CDZI)
CDZI provides water solutions in the United States. It operates through Land and Water Resources; and Water Treatment Business segments. It offers clean water solutions, and water storage, conveyance, and treatment solutions.
CDZI’s forward EV/Sales and Price/Sales of 106.06x and 86x are significantly higher than the industry averages of 3.90x and 2.21x, respectively.
CDZI’s trailing-12-month gross profit margin is 37.71% compared to the industry average of 37.69%. Its trailing-12-month ROCE, ROTC, and ROTA of negative 79.91%, 9.68%, and 22.38% compare to the 8.99%, 3.79%, and 2.50% industry averages, respectively.
For the fiscal year that ended December 31, 2022, CDZI’s operating loss came in at $16.56 million. Its net loss and comprehensive loss applicable to common stock came in at $29.90 million, while its net loss per common share came in at $0.60.
Furthermore, its total current liabilities came in at $5.64 million for the year that ended December 31, 2022, compared to $2.51 million for the year-ago period (ended December 31, 2021).
Analysts expect CDZI’s EPS to be negative $0.26 for the fiscal year ending December 2023. Its revenue is expected to be $3.01 million for the same year.
The stock has plunged 14.2% over the past five days to close the last trading session at $3.51. It has also declined 19.5% over the past month.
CDZI’s bleak prospect is reflected in the POWR Ratings system. It has an overall rating of D, which translates to Sell in our proprietary rating system.
The stock also has a D grade for Quality and an F for Value. It is ranked #13 within the same industry.
Click here to see the POWR Ratings of CDZI (Growth, Sentiment, Momentum, and Stability).
Ocean Power Technologies, Inc. (OPTT)
OPTT develops and commercializes proprietary systems that generate electricity by harnessing the renewable energy of ocean waves in North America, South America, Europe, and Asia. It offers the PB3 PowerBuoy system that generates power for the power grid in offshore locations.
OPTT’s trailing-12-month Price/Sales of 11.61x is 776.6% higher than the industry average of 1.32x.
OPTT’s trailing-12-month gross profit margin of 23.37% is 20.2% lower than the industry average of 29.29%. Its trailing-12-month ROCE, ROTC, and ROTA are negative 34.69%, 24.43%, and 37.16% compare to the 13.67%, 6.96%, and 5.16% industry averages, respectively.
For the third quarter that ended January 31, 2023, OPTT’s operating loss expanded 28.5% year-over-year to $7.06 million. For the same quarter, its net loss and net loss per share came in at $6.09 million and $0.11, up 11.3% and 10% year-over-year, respectively.
Furthermore, for the nine months that ended January 31, 2023, OPTT’s cash, cash equivalents, and restricted cash came in at $11.14 million compared to $64.06 million for the nine months that ended January 31, 2022.
The stock has plunged 64.1% over the past year to close the last trading session at $0.52. It also declined 8.8% over the past month.
It’s no surprise that OPTT has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
The stock also has a D grade for Growth and Sentiment and an F for Value and Quality. It is ranked last within the same industry.
Click here to see the POWR Ratings of OPTT for Momentum and Stability.
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MSEX shares were trading at $79.10 per share on Wednesday morning, up $0.25 (+0.32%). Year-to-date, MSEX has gained 0.92%, versus a 7.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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