Why You Should Consider York Water Stock (NASDAQ:YORW)

Daniel Balakov

Now, the first answer to the question posed in this article would be “Yes”. York Water Company (NASDAQ: YORW) can certainly help limit your downside even if the market seems to be collapsing all around us.

Why am I saying that?

Take a look at what York Water has been up to since I last wrote about the company in my July article, during which the S&P did nearly zero, and most companies appear to be firmly down.

Article YORW

Article YORW (Looking for Alpha)

Not a bad trajectory at all, given what the market has done since. The reason for this performance is simple. There are very, very few things that can derail a business like York Water – arguably it doesn’t exist, apart from a macro disaster – and by that I mean even bigger than the pandemic.

And it’s a superb investment – provided you can buy it for half a decent price, like I did a few months ago.

York Water Update

York Water Company is, as its name and my previous articles suggest, concerned with water.

They do this for a relatively small area – 51 municipalities in three counties. Now I own a few businesses that manage water and waste – and when it comes to water, the things to understand about the business are its assets and its dependencies. My other water investments are mainly in Uponor (OTCPK:UPNRY), a Finnish company not in regulated water utilities and distribution, but in water infrastructure and installation – closer to a typical infrastructure company/entrepreneur.

York Water, meanwhile, provides water services to approximately 200,000 people. As we move into environments and patterns that clearly seem to be characterized by higher degrees of weather instabilities, it’s important to see how this might impact the business. Weather conditions influence water supply budgets and impoundment levels, and create challenges for the company in managing its supply.

The company has a very low capital intensive business that is not subject to massive CapEx – it has no ambition to expand beyond its current domain, just managing its assets. It does not require a massive amount of working capital. This visibility on its cash flows is typically one of its strengths. However, it is not immune to inflation or other external effects, which may give it some risk in operating in an environment like this. YORW has been a great investment on a historical basis. If you had invested money in the company at 21X P/E in 2002, your annualized RoR would be today, even taking recent declines into account, close to 9%, or 450% RoR in total.

If you invest at the right time and with the right timing in mind, this company can really deliver absolutely solid alpha, despite its size and usual overvaluation.

Keep in mind what I said though – a constant dividend does not mean the longest growth. York Water Company does not hesitate to reduce this proven dividend if necessary. They did this in 2006 and again in 2008 – but since then it has had a streak of growth until it currently sits at around 2% yield.

The company recently issued its 607th consecutive dividend – it also released 2Q22. Both EPS and revenue saw slight single-digit beats. There are very few/no surprises for a company like this. YORW also does not host earnings calls.

A quick look at the numbers shows us that things continue to run as normal with YORW, with no issues or real issues in sight. The company should continue to generate double-digit earnings growth even this year while paying its current rate of 1.76% – a very small amount, but backed by what I would say is beyond bond safety.

Importantly, even with 2Q22 now past, there has been no material impact to the business as a result of COVID-19. We are also receiving greater clarity with regards to profits, with company revenue increasing more than offsetting cost/expense increases. Turnover increased by 8% at the operational level, mainly thanks to the growth of the customer base and the royalties for the development of the distribution network (DSIC), authorized by the regulators. The average number of sewage customers served in 2022 has increased, as YORW actually acquired West Manheim Township, and water customers have increased by approximately 750 to just over 70,000.

Operating expenses also saw a slight increase – most of it due to depreciation, insurance, water treatment and increased labor costs.

The company also, somewhat surprisingly, recorded a decline in interest expense of almost 1.5%, mainly due to the repayment of long-term debt and the repayment of a line of credit.

Recent mergers and acquisitions are the big news for the company, although it’s a relatively small acquisition, all things considered.

On June 9, 2022, the Company signed an agreement to purchase the wastewater collection and treatment assets of MESCO, Inc. in Monaghan Township, York County, Pennsylvania. Completion of the acquisition is subject to obtaining the approval of all relevant regulatory authorities. Closing is expected in the first quarter of 2023, at which time the Company will add approximately 180 wastewater customers.

(Source: YORW-10-Q)

There are 4 more of the same size, totaling approximately 200 additional sewage and water customers for the business. Thus, YORW does not remain inactive.

Overall, my updated thesis from this article is based on increased visibility despite headwinds. Despite rate increases and instability, YORW corporate earnings remain stable and the business continues to generate very impressive levels of EPS stability. I don’t expect any surprises, and what little uncertainty about rates and the current macro there was, I no longer consider any of that to be relevant.

This leads me to be more positive about the company.

York Water Company Assessment

York Water Company remains at an extreme premium. You are now looking at a P/E above 33x with a growth forecast of 4% per year. Not big numbers at all, until you consider that valuing this company at a 5-year forward average P/E multiple, it could earn close to 15% annually – and you give the company some credibility for what it “is”.

I bought shares of the company at a price closer to 30x P/E, which was a valuation I could bear. Since today’s market action, this company is once again hovering very close to that $40 mark, pushing the yield close to 1.9%.

Provided you accept the company’s 10-year bonus of 33.5X or even a 5-year average bonus of 37X, there is an advantage to be had here in the company. You can still call it a conservative edge if you expect the company to maybe go back to that 38-40X multiple or so. In almost any case you care to calculate here between a P/E of 32 to 40x on a forward basis, YORW now generates near or above double-digit annual RoR, with a forward P/E of 37x ranging up to 17% per year.

I would consider YORW at a forward P/E maybe closer to 33x at most. At 33x, the company now shows double-digit upside potential.

YORW backwards

YORW backwards (FAST Charts)

I would therefore say that it is time, at this assessment, to reiterate my “BUY” on York Water Company. I would argue that YORW has a conservative edge, with the company edging closer to the vault of companies like adidas (OTCQX:ADDYY) or LVMH (OTCPK:LVMUY).

It’s still not such a clean investment or bullish thesis that I would like to present. Anytime a company trades above 30X, the demands on those cash flows and securities are extreme – and now we’re just a little over 30x. But it’s definitely getting pretty close at nearly $40/share here.

My PT is closer to a 33X P/E and stands at $44/share – and that’s where I would consider the company too expensive to buy. If you look at the stock price now, you can see that the company is quite significantly undervalued for my PT, and it might be time to go ahead and “BUY” more of the company here .

S&P Global would agree with this overall assessment, giving the company an average “BUY” of $55/share. This means the company is now 31.7% undervalued against that analyst price target (Source: S&P Global). I wouldn’t go that far – but I would say the company is most definitely starting to look undervalued and overly sanctioned by the market.

So it’s time to add to the company here. My thesis is updated and strengthened in part due to the increased clarity of 2Q22 results, but also due to recent price action which has seen the company drop significantly.

The benefit the company has provided is excellent – and I could add more here.

Thesis

My thesis for York Water Company is as follows

  • It is the oldest company that regularly pays dividends. It trades at a significant premium, but may well deserve some of that premium.
  • My target for YORW is a P/E of 33X, accepting the 10-year P/E average, which gives us a PT of $44/share.
  • I consider YORW a “BUY” here, and I think the upside is close to 11%, even for a P/E of 33x here. This is enough for me to reiterate and reinforce my positive thesis.

Remember, I’m all about:

  • Buy undervalued companies – even if that undervaluation is slight and not incredibly massive – at a discount, allowing them to normalize over time and reap capital gains and dividends in the meantime.
  • If the company goes well beyond normalization and enters overvalued, I reap gains and rotate my position to other undervalued stocks, repeating #1.
  • If the company does not go into overvaluation but is at fair value, or goes back down to undervaluation, I buy more if time permits.
  • I reinvest the proceeds of dividends, labor savings or other cash inflows as specified in point 1.

Here are my criteria and how the company meets them (in italics).

  • This company is overall qualitative.
  • This company is fundamentally safe/conservative and well run.
  • This company pays a well-covered dividend.
  • This company is currently cheap.
  • This company has a realistic advantage based on earnings growth or multiple expansion/reversion.

Thanks for the reading.

James T. Quintero