BofA Securities analyst Ross Fowler initiated coverage on Middlesex Water Company (NASDAQ:MSEX) with an Underperform rating and a price forecast of $56.
Fowler notes that Middlesex Water is the most expensive utility in their coverage, trading at a 47% premium to the utility group and a 13% premium to the water group.
Despite strong past growth, the analyst projects rate base and EPS growth to slow below the peer average, which, combined with increasing regulatory risk and uncertainty around capital spending, makes the current valuation unjustified.
The analyst acknowledges Middlesex Water's recent growth but does not see any catalyst for further share price appreciation, even with more aggressive capital expenditure assumptions.
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Fowler forecasts Middlesex Water's EPS to grow at a 5.2% CAGR from 2024 to 2027, with estimates of $2.34 in 2024, $2.45 in 2025, $2.59 in 2026, and $2.72 in 2027.
The analyst forecasts capital expenditures to exceed guidance, driven by the national push for water quality investment, resulting in a 7.6% annual rate base growth through 2027.
However, this is slower than the recent 15% rate base growth driven by one-time water quality investments.
Per the analyst, the focus on limiting water customer bill increases will restrict further upside for Middlesex Water, especially as the company relies more on frequent rate cases.
Additionally, Middlesex Water may need to raise external equity starting in 2025, forecasting $25 million per year to bring its equity capitalization closer to authorized levels.
The analyst notes that Middlesex Water expects 4% customer growth in 2024, but acknowledges that economic conditions could make achieving that growth challenging.
The analyst assumes 4% growth for 2024, but adjusts it to 3% in their model.
The analyst also points out that if growth slows down, it could negatively impact revenue and capital expenditure estimates.
Price Action: MSEX shares are trading lower by 1.66% to $60.31 at last check Wednesday.
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