SJW Group
SJW
Updated November 2nd, 2023
Key Metrics
Current Price:
$63
5 Year CAGR Estimate:
12.1%
Market Cap:
$2.0 B
Fair Value Price:
$70
5 Year Growth Estimate:
8.0%
Ex-Dividend Date:
11/03/23
% Fair Value:
90%
5 Year Valuation Multiple Estimate:
2.0%
Dividend Payment Date:
12/01/23
Dividend Yield:
2.4%
5 Year Price Target
$102
Years Of Dividend Growth:
55
Dividend Risk Score:
A
Retirement Suitability Score:
B
Rating:
Buy
Overview & Current Events
SJW Group is a water utility company that produces, purchases, stores, purifies and distributes
water to consumers and businesses in the Silicon Valley area of California, the area north of San
Antonio, Texas, Connecticut, and Maine. SJW Group has a small real estate division that owns
and develops properties for residential and warehouse customers in California and Tennessee.
The company generates about $630 million in annual revenues.
On October 30th, 2023, SJW Group reported third quarter results for the period ending September
30th, 2023. For the quarter, revenue increased 16.4% to $204.8 million, which was $17.8 million
better than expected. Earnings-per-share of
$1.13 compared favorably to earnings-per-share of $0.82 in the prior year and was $0.18 above
estimates.
As has been the case in prior quarters, growth for the period was largely due to water rate
increases and new customers. Higher rates added $22.6 million to results while new customers
contributed $1.1 million. Higher customer usage added $8.3 million. Customer usage had been
down over the past few quarters. Water production expenses increased $9 million, or 12%, to
$82.6 million.
SJW Group provided an updated outlook for 2023 as well, with the company now expecting
earnings-per-share in a range of $2.65 to $2.70 for the year, up from $2.40 to $2.50 previously.
At the midpoint, this would be a 10.3% increase from the prior year.
Growth on a Per-Share Basis
Year
2013
EPS
$1.12
DPS
$0.73
Shares1
20
SJW Group’s earnings-per-share often vary wildly from year to year, but earnings-per-share
growth over the past 10 years is 6.2%, an impressive growth rate for a water utility. Following the
CTWS merger, we estimate that the SJW Group will grow earnings at the average growth rate
slightly ahead of the combined companies (8.0%) due to revenue growth and rate increases. In
connection with the CTWS merger, SJW Group issued nearly 8 million new shares on December
5th, 2018 in order to fund 50% of the proposed transaction, but we do not expect any significant
additional dilution on the horizon.
SJW Group raised its dividend 5.6% for the March 1st, 2023 payment, marking 55 consecutive
years of growth for this Dividend King. SJW has a 10-year average growth rate of 4.8%. We
expect dividends to grow at a rate of 6% annually through 2028.
Valuation Analysis
Year
2013
2014
2015
Avg. P/E
24.3
11.2
16.6
Avg.
Yld.
2.7%
2.6%
2.5%
Shares of SJW Group have decreased $7, or 10%, since our August 1st, 2023 update.
Price-to-earnings multiples for water utilities tend to be high, but SJW Group’s multiple was
extremely high in the 2018-2021 time period. Using EPS estimates for the year, the stock trades
with a forward P/E of 23.5. We are reaffirming our 2028 target P/E of 26 from 22 as this is more
in-line with the long-term average valuation and considers the quality of earnings over the past
few years. If shares were to revert to this target P/E by 2028, then valuation would be a 2.0%
tailwind to annual returns over this period.
Safety, Quality, Competitive Advantage, &
Recession Resiliency
Year
Payou
t
Many investors own utility companies for their reliable earnings and dividends, especially for
uncertain economic times. During the last recession, SJW Group experienced a decline in
earnings that took several years to recover. A key competitive advantage for SJW Group, aside
from the concluded merger, is that it operates in two areas, Silicon Valley and Central Texas, that
have seen high levels of population growth in recent years. These areas need improved water
infrastructure to serve a growing client base, so local governments often allow the company to
raise rates at a relatively high level in order to fund these projects. For example, SJW Group was
approved for a 4.2% increase in 2018 for its customers in the Silicon Valley area. The company
applied for rate increases of 9.8%, 3.7% and 5.2% over the next three years for this area. SJW
Group settled pending rate cases in several states in 2022. This benefit has been reflected in the
past few quarters as rate increases have been the primary driver of revenue growth for the
company. Investors should be aware of is that SJW Group’s earnings are highly concentrated in
California (60% of sales post Connecticut Water Service merger) and Connecticut (30% of sales
post-merger).
Final Thoughts & Recommendation
Following third quarter results, SJW Group is now projected to return 12.1% annually through
2028, which is up from our previous estimate of an 8.0% return. Our projected return stems from
8% earnings growth, a starting dividend yield of 2.4%, and a small contribution from multiple
expansion. Shares of SJW Group are down almost 20% over our last two reports. The upside is
that the stock is now much more attractive, both on a total return and valuation basis. Rate
increases have been a tailwind to results and customer usage has improved. We note that the
stock has a market beating yield and that SJW Group is a Dividend King. We have raised our
five-year price target $8 to $102 due to revised EPS estimates for the year. We now view shares
of SJW Group as a buy due to projected returns.
Income Statement Metrics
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Revenue
277
320
305
340
389
398
420
565
574
621
Gross Profit
142
182
179
196
213
211
224
317
319
357
Gross Margin
51.5%
57.1%
58.8%
57.6%
54.7%
52.9%
53.3%
56.1%
55.5%
57.5%
SG&A Exp.
44
41
47
42
49
49
66
80
87
95
D&A Exp.
37
39
42
46
51
57
68
92
96
106
Operating Profit
53
93
80
97
102
92
73
118
106
125
Operating Margin
19.3%
29.1%
26.2%
28.7%
26.2%
23.1%
17.4%
20.8%
18.5%
20.1%
Net Profit
22
52
38
53
59
39
23
62
60
74
Net Margin
8.1%
16.2%
12.4%
15.6%
15.2%
9.7%
5.6%
10.9%
10.5%
11.9%
Free Cash Flow
(34)
(38)
(12)
(31)
(51)
(57)
(53)
(111)
(124)
(78)
Income Tax
14
25
23
34
35
10
8
8
8
8
Balance Sheet Metrics
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total Assets
1,110
1,269
1,337
1,443
1,458
1,956
3,132
3,311
3,492
Cash & Equivalents
2
2
5
6
8
421
13
5
11
Accounts Receivable
14
15
16
16
17
19
36
47
54
Inventories
1
Goodwill & Int. Ass.
18
14
16
24
14
17
662
663
677
Total Liabilities
789
909
954
1,022
995
1,067
2,242
2,394
2,458
Accounts Payable
13
7
16
19
23
25
35
34
30
Long-Term Debt
358
398
415
448
456
531
1,423
1,539
1,595
Shareholder’s Equity
321
360
384
422
463
889
890
917
1,035
LTD/E Ratio
1.11
1.11
1.08
1.06
0.98
0.60
1.60
1.68
1.54
Profitability & Per Share Metrics
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
Return on Assets
2.0%
4.4%
2.9%
3.8%
4.1%
2.3%
0.9%
1.9%
1.8%
Return on Equity
7.5%
15.2%
10.2%
13.1%
13.4%
5.7%
2.6%
6.8%
6.2%
ROIC
3.4%
7.2%
4.9%
6.3%
6.6%
3.3%
1.3%
2.6%
2.4%
Shares Out.
20
20
20
21
21
29
29
29
30
Revenue/Share
13.86
15.66
14.87
16.50
18.82
18.64
14.72
19.67
19.29
FCF/Share
(1.68)
(1.84)
(0.60)
(1.51)
(2.48)
(2.67)
(1.85)
(3.87)
(4.16)
Note: All figures in millions of U.S. Dollars unless per share or indicated otherwise.
Disclaimer
Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this research report should be construed as a recommendation to follow any investment strategy
or allocation. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed
on any such statements or forecasts when making any investment decision. While the analyst has used reasonable efforts to obtain information from reliable sources, we make no
representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no
inference to the contrary should be made. There is a risk of loss from an investment in marketable securities. Past performance is not a guarantee of future performance.