Merger And Sector Downgrades Will Shift Water Demand Outlook Forward

Key Takeaways

• Strategic acquisitions and infrastructure investments, along with regulatory compliance, position the company for accelerated revenue and margin growth amid demographic and urbanization trends.
  
• Strong execution in rate cases and a robust ESG profile bolster earnings stability, investor appeal, and support for sustainable long-term growth.
  
• Regulatory scrutiny, slow customer growth, rising compliance costs, persistent inflation, and M&A execution risks threaten future revenue, margins, and long-term earnings growth.

Catalysts

Through its subsidiaries, operates regulated utilities that provide water, wastewater, and natural gas services in the United States.

• Ongoing and anticipated infrastructure investment-$1.4 billion planned for 2025 and a multi-year CAGR of 6–8% in regulated rate base-positions Essential Utilities to capitalize on expanding, long-term demand for water and wastewater services due to population growth and urbanization, supporting reliable revenue and cash flow growth.
  
• Growing regulatory emphasis on water quality (e.g., PFAS compliance) and aging infrastructure creates acquisition opportunities as municipalities struggle to meet new standards; Essential's scale, patented PFAS solution, and capital resources should enable accelerated top-line growth and margin expansion via strategic acquisitions.
  
• Expansion in high-growth regions (notably Texas, with 25,000 new connections over 10 years and 90,000 in the pipeline) leverages favorable demographic and economic trends, bolstering customer growth and long-term revenue visibility.
  
• Strong execution in regulated rate cases (with recent approvals in Pennsylvania and Kentucky, and several major filings pending) continues to drive higher allowed returns and improved earnings stability, mitigating adverse impacts of cost inflation and regulatory lag on net margins and earnings.
  
• Enhanced ESG profile and consistent dividend increases (now 30+ years) position Essential Utilities to benefit from ongoing investor demand for sustainable, resilient infrastructure businesses, potentially lowering its cost of capital and supporting higher long-term earnings and payout growth.

Essential Utilities Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Essential Utilities's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.6% today to 27.0% in 3 years time.
• Analysts expect earnings to reach $732.2 million (and earnings per share of $2.49) by about September 2028, up from $645.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, up from 16.6x today. This future PE is greater than the current PE for the US Water Utilities industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 2.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Essential Utilities Future Earnings Per Share Growth

Risks

• Rising regulatory and political scrutiny on rate increases-particularly in Pennsylvania and across its multi-state footprint-may compress Essential Utilities' ability to achieve future revenue growth targets, limiting pricing power and ultimately affecting earnings.
  
• Slower customer growth in key service territories, as indicated by stable customer counts through 2027 and dependence on specific regional growth (e.g., Texas and potentially hyperscaler developments), could lead to stagnating top-line revenue, especially if expected expansion in fast-growing regions underperforms.
  
• Escalating infrastructure replacement and environmental compliance costs-including large-scale PFAS remediation, aging pipe replacement, and cybersecurity investments-risk sustained pressure on net margins as operating expenses rise faster than allowed returns.
  
• Elevated interest rates and inflation are already increasing O&M, depreciation, and interest expenses; continued higher cost of capital can strain Essential Utilities' ability to fund $1.4 billion annual infrastructure investments and hinder long-term earnings growth.
  
• Execution and integration risks related to M&A-driven growth are significant, with delays (as seen with DELCORA and other municipal acquisition opportunities), potential overpayment for assets, and regulatory or legal obstacles threatening the accretiveness of deals, thereby impacting future earnings per share.

Valuation

• The analysts have a consensus price target of $46.375 for Essential Utilities based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $732.2 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of $38.28, the analyst price target of $46.38 is 17.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.