California Water Service Group Valuation – October 2018 $CWT

Company Profile (excerpt from Reuters): California Water Service Group, incorporated on August 2, 1999, is a holding company. The Company operates through the supply and distribution of water and providing water-related utility services segment. The Company, through its subsidiaries, provides non-regulated services and non-regulated services to private companies and municipalities. The bulk of the business consists of the production, purchase, storage, treatment, testing, distribution and sale of water for domestic, industrial, public and irrigation uses, and for fire protection. It also provides non-regulated water-related services under agreements with municipalities and other private companies. The non-regulated services include water system operation, billing and meter reading services. Non-regulated operations also include the lease of communication antenna sites, lab services and promotion of other non-regulated services. Its subsidiaries include California Water Service Company (Cal Water), New Mexico Water Service Company (New Mexico Water), Washington Water Service Company (Washington Water), Hawaii Water Service Company, Inc. (Hawaii Water) and CWS Utility Services and HWS Utility Services LLC.


Downloadable PDF version of this valuation:

ModernGraham Valuation of CWT – October 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,037,687,186 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.30 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 28.65% Fail
6. Moderate PEmg Ratio PEmg < 20 36.33 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.97 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.30 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -0.96 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass


Stage 2: Determination of Intrinsic Value

EPSmg $1.17
MG Growth Estimate 1.16%
MG Value $12.63
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $16.92
MG Value based on 0% Growth $9.92
Market Implied Growth Rate 13.92%
Current Price $42.39
% of Intrinsic Value 335.57%

California Water Service Group does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.08 in 2014 to an estimated $1.17 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 13.92% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into California Water Service Group revealed the company was trading above its Graham Number of $19.42. The company pays a dividend of $0.72 per share, for a yield of 1.7% Its PEmg (price over earnings per share – ModernGraham) was 36.33, which was above the industry average of 22.78. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-39.81.

California Water Service Group scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$39.81
Graham Number $19.42
PEmg 36.33
Current Ratio 0.30
PB Ratio 2.97
Current Dividend $0.72
Dividend Yield 1.70%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $189,570,000
Total Current Liabilities $622,300,000
Long-Term Debt $414,530,000
Total Assets $2,789,514,000
Intangible Assets $2,615,000
Total Liabilities $2,103,582,000
Shares Outstanding (Diluted Average) 48,073,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.16
Dec2017 $1.40
Dec2016 $1.01
Dec2015 $0.94
Dec2014 $1.19
Dec2013 $1.02
Dec2012 $1.17
Dec2011 $0.90
Dec2010 $0.90
Dec2009 $0.98
Dec2008 $0.95
Dec2007 $0.75
Dec2006 $0.67
Dec2005 $0.74
Dec2004 $0.70
Dec2003 $0.57
Dec2002 $0.63
Dec2001 $0.49
Dec2000 $0.66
Dec1999 $0.72
Dec1998 $0.66

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.17
Dec2017 $1.15
Dec2016 $1.04
Dec2015 $1.05
Dec2014 $1.08
Dec2013 $1.02
Dec2012 $1.00
Dec2011 $0.91
Dec2010 $0.89
Dec2009 $0.87
Dec2008 $0.80
Dec2007 $0.71
Dec2006 $0.68
Dec2005 $0.66
Dec2004 $0.62
Dec2003 $0.59
Dec2002 $0.61

Recommended Reading:

Other ModernGraham posts about the company

California Water Service Group Valuation – Initial Coverage $CWT

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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