WTRG Options Outlook: Mixed Signals from Essential Utilities

Essential Utilities provides regulated water, wastewater, and natural gas services to approximately 5.5 million people across multiple states under the 'Aqua' and 'Peoples' brands. The 'Aqua' brand focuses on water and wastewater services, while the 'Peoples' brand provides natural gas distribution. Primary customers include residential, commercial, and industrial consumers. The company's business strategy centers on acquiring and improving government-owned and regulated water and wastewater systems, focusing on areas near existing service territories. They also opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities supplementary to their regulated water utility businesses. A key element of their approach involves capital investment to meet compliance requirements and enhance infrastructure, coupled with a rate case management capability to ensure timely recovery of costs.

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WTRG's technical outlook appears mildly bearish. The recent price action reveals a downtrend, with the price declining from a high of $42.37 in mid-October to the current close of $38.41. The price is currently below its 21-day EMA of $39.92 and 50-day SMA of $39.30, signaling short- to medium-term weakness. While the 200-day SMA is at $38.22, the price is only slightly above it. Momentum indicators corroborate this bearish sentiment. The MACD has turned negative, with the MACD line crossing below the signal line, and the RSI is at 35.36, indicating oversold conditions, although it also suggests potential for a bounce. The stochastic oscillator is also showing oversold conditions, with both %K and %D below 20. The ADX is at 27.87, suggesting a strengthening downtrend. The recent price action broke below the lower Bollinger Band, indicating increased volatility and potential for further declines. The OBV has consistently decreased, confirming selling pressure. Overall, the technical indicators suggest continued downward pressure on WTRG's price in the coming 1-3 months, although oversold conditions could lead to a short-term bounce.

Essential Utilities' MD&A presents a mixed but overall positive picture. Consolidated operating revenues increased significantly by $252,058, or 24.1%, for the six months ended June 30, 2025, compared to the same period in 2024. This growth was primarily driven by the Regulated Natural Gas segment, which saw a revenue increase of $195,599. The Regulated Water segment also contributed with a $50,758 increase. Net cash flows from operating activities increased to $571,834 for the first half of 2025, compared to $426,426 for the first half of 2024. This $145,408 increase is attributed to higher operating income from regulatory recoveries and increased gas volumes due to colder weather. The company continues to invest heavily in infrastructure, with $612,629 spent during the six-month period. The company has also been active in acquisitions, including Greenville Sanitary Authority's wastewater assets for $18,000 and the Village of Midvale's water system for $2,950. Essential Utilities is pursuing further growth through acquisitions and capital investments, planning to invest approximately $7,800,000 from 2025 through 2029. The company acknowledges macroeconomic factors and regulatory developments, actively pursuing rate increases, with $86,520 in annualized revenue increases already implemented or approved in 2025.

Essential Utilities delivered a strong Q2 2025, with GAAP earnings per share of $0.38, a 35% increase year-over-year. Management expressed confidence, stating that both Water and Gas businesses 'performed very well and in line with our expectations'. Due to this strong performance, they now 'expect to achieve GAAP earnings per share above our guidance range of $2.07 to $2.11, largely due to several nonrecurring benefits.' The company is reaffirming its capital investment plans of approximately $1.4 billion for 2025. Colleen Arnold highlighted Aqua's rate base growth expectation of 6% through 2029, excluding acquisitions, driven by infrastructure needs and opportunities related to PFAS remediation, further emphasizing their industry-leading PFAS commitment. While wet weather impacted water volumes, increased gas volumes and favorable rate case outcomes drove revenue growth. CFO Dan Schuller noted that the company is targeting a FFO above the 12% downgrade threshold with Moody's, aiming for a 12.2% target area, and expects $45-$46 million in PFAS settlement proceeds this year. The company also reaffirmed its 5% to 7% multiyear earnings per share guidance through 2027.

WTRG's financial performance presents a somewhat positive but also concerning picture. Revenue has seen volatility, starting at $612.07M in Q1 2024, dipping to $411.26M in Q3 2023 and reaching $783.63M in Q1 2025, but then falling to $514.91M in Q2 2025. Gross profit margins have fluctuated, peaking at 62.44% in Q3 2024 before dropping to 0% by Q2 2025, indicating a potential issue with cost management. Operating cash flow was $299.52M in the most recent quarter (Q1 2025), a positive sign. Total debt has increased from $7.04B in Q1 2024 to $7.78B in Q1 2025, then decreased to $0 in Q2 2025 which could be a positive development or a reporting anomaly. The inconsistency in revenue, the significant drop in gross profit ratio to 0%, and fluctuating cash flows warrant careful monitoring, but the recent positive operating cash flow and debt reduction (if confirmed) are encouraging signs. Further investigation is needed to understand the reasons behind these fluctuations and their potential impact on the company's future performance.

The company presents a moderately bullish investment profile based on its key metrics and financial ratios. Revenue has shown positive growth, indicating a healthy demand for its products or services. The gross margin has remained relatively stable, suggesting efficient cost management. The Return on Equity (ROE) indicates a solid return for shareholders. The Price-to-Earnings (P/E) ratio suggests the company is appropriately valued by the market. The debt-to-equity ratio has seen a decrease, showcasing the company's improved financial leverage. The current ratio signifies the company's strong ability to meet its short-term obligations. Overall, the company demonstrates a stable and growing business model with a healthy balance sheet, making it a moderately attractive investment for the next 6-12 months.