H2O America (HTO) Stock Evaluation

H2O America is a water utilities company that is involved in producing, acquiring, storing, treating, distributing, and selling water, both wholesale and retail, as well as providing wastewater services. It mainly operates in California, but also has operations in Texas and the Northeast, specifically Maine and Connecticut. As of 2024, the company had 407,000 service connections, servicing 1.6 million people. The company is also actively pursuing various ESG initiatives, looking to decrease its GHG emissions and overall effect on the environment.

Our model is extremely optimistic about the future of H2O America. One major reason for this is the exclusion of interest payments in calculating future free cash flows. For a company with over $1.7 Billion in long term debt, with a relatively small $180 million or so EBIT, interest payments inevitably consume a large amount of the companies earnings. While this large debt load may appear to be a major detractor from the companies value, they boast over $3.4 billion in net PPE, including pipelines and treatment facilities. Displaying their ability to help use debt to effectively leverage in the cash generating assets. \

In addition, if we look towards company multiples, they have comparatively low EV/Revenue and EV/EBITDA being about 4.5 and 11.5 respectively compared to 6 and 15-20 which make up much of the sector. This may be due to the companies smaller size, but it reflect room for growth in the future.

Update 11/6:

After investigating the extreme optimism of the model we found that there was a major formula error that drastically increased the depreciation expense, thus increasing the overall valuation of the company. After fixing the error, which required adding a few lines to the model and changing a few assumptions, we find that the company actually has negative free cash flows. This can be attributed to its capital expenditures which are greater than EBIT. While this is definitely cause for concern, we still see a positive trend in cash flows, which is echoed by Capital IQ's consensus estimates, as they see positive FCFs sometime in 2028/2029. This may prompt us to create a model with a 10-year projeciton sometime in the future, but for now we still see that a comp analysis leaves the company with room to grow.