BofA Securities analyst Ross Fowler recently initiated coverage on California Water Service Group (NYSE: CWT) with a Buy rating and a $57 price target, representing a potential 17% upside. This bullish outlook stems from the company’s compelling valuation, improving earnings prospects, and ambitious capital investment plans.
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Fowler highlights that California Water Service Group is currently the most undervalued U.S. water utility, trading at an 8% discount to the sector and a significant 19% discount to its closest competitor, American States Water Company (NYSE: AWR). This discrepancy presents a compelling investment opportunity, especially considering the company’s positive growth trajectory.
A Deep Dive into California Water’s Value Proposition
The core of Fowler’s thesis lies in the convergence of several key factors:
Attractive Valuation:
Despite its strong fundamentals, California Water trades at a lower multiple than its peers. This undervaluation creates an attractive entry point for investors seeking exposure to the stable and growing water utility sector. As the market recognizes the company’s intrinsic value, a re-rating could drive significant share price appreciation.
Robust Capital Investment Plan:
California Water has outlined substantial capital expenditures for 2025-2028, nearly double the amount spent from 2022-2024. These investments, focused on infrastructure upgrades and expansion, are poised to enhance operational efficiency and drive future earnings growth. While regulatory disallowances pose a risk, Fowler’s conservative 80% recovery assumption still supports an estimated 8%-10% EPS growth and over 10% rate base growth through 2027.
Improving Earnings Outlook:
Fowler projects California Water’s EPS to reach $2.34, $2.63, and $2.85 in 2025, 2026, and 2027, respectively. This positive earnings trajectory, driven by operational improvements and capital investments, further reinforces the company’s undervalued status. The anticipated cash flow improvement resulting from the 2021 General Rate Case further strengthens the company’s financial position.
Strategic Positioning within the Water Utility Landscape
Fowler advocates for a value-oriented approach to the water utility sector, anticipating that premium valuations in this space will eventually align with those observed in electric and gas utilities. This strategic perspective suggests that California Water’s current discount relative to its peers presents a significant opportunity for long-term investors. The need for $50 to $100 million in annual equity to maintain a healthy capitalization, while potentially requiring authorization increases, underscores the company’s commitment to financial stability and growth.
Conclusion: A Compelling Investment Opportunity
California Water Service Group presents a compelling investment case based on its attractive valuation, significant capital investment plan, and improving earnings outlook. The company’s strategic positioning within the water utility sector, coupled with the potential for valuation convergence with other utilities, reinforces the bullish thesis. Investors seeking a stable, undervalued utility stock with long-term growth potential should consider adding California Water Service Group to their portfolios. The current share price, trading slightly higher at $48.71, may offer an opportune entry point before the market fully recognizes the company’s intrinsic value.
