Water play Evoqua’s stock slides for a second day after earnings miss

Evoqua Technologies Corp. shares slid another 4% on Wednesday, adding to prior-day losses of almost 5%, after the company posted weaker-than-expected earnings for its fiscal third quarter.

Evoqua AQUA, -4.22% , a water-treatment company that is one of few pure-play water investments, said it had net income of $1 million, or 1 cent a share, in the quarter, down from $1.8 million, also breaking down to 1 cent a share, in the year-earlier period. Revenue rose to $342.5 million from $311.1 million. The FactSet consensus was for per-share earnings of 19 cents and revenue of $343 million.

The company, which came to the public markets last November, said it still expects full-year revenue of $1.34 billion to $1.37 billion; the FactSet-calculated consensus estimate calls for revenue of $1.36 billion. The fourth quarter is typically the company’s strongest and produces peak margins.

As has been the case with many industrial companies this earnings season, its margins were hurt by rising raw-material costs, and the uncertainty created by the current trade tensions that have seen the U.S., China and Europe place new tariffs on imports.

“We have aggressively implemented pricing actions across the business and began to see results in the month of June,” Chief Executive Ronald Keating told analysts on the company’s earnings call. “While we’re not immune to the direct impact of tariffs, our strong North American base of business, puts us in a relatively strong position.”

Revenue in the industrial segment rose 18% in the quarter to $182.3 million. That business helps industrial clients with equipment and support for process water, utility water, boiler feedwater and to treat steam condensate. Evoqua can also help with removing contaminants from water, such as selenium, mercury, arsenic and copper.

The industrial business was boosted by the acquisitions of ADI Systems, a wastewater treatment company; Noble Water Technologies, a provider of high-purity water equipment and services; and Pure Water Solutions, another provider of high-purity water equipment that operates in Colorado and New Mexico. The acquisitions added $11.1 million to the segment’s revenue.

Evoqua is an active acquirer in the water sector, and Keating said the company still believes there are a significant number of acquisition opportunities at attractive valuations.

But the company is not the only one, as Raymond James analyst Pavel Mochanov noted. There have been 25 transactions in water technology this year so far, he said, with sellers representing a broad range of players across the water value chain, and buyers ranging from established players to new entrants and private-equity firms.

“As such, Evoqua must contend with plenty of other interested parties,” said Molchanov. “Management has demonstrated a successful track record of M&A, but guidance deliberately (and wisely) takes an organic-only approach.” Raymond James rates Evoqua outperform, the equivalent of a buy rating, and has a stock-price target for the stock of $26, equal to 37% above its current trading level.

Evoqua’s municipal segment, which helps local government keep water clean, saw its revenue fall 5.8% to $68.5 million in the quarter. But operating profit rose 20% to $12.7 million, boosted by a gain from the sale of land at a plant in Australia.

Keating said the revenue decline was due to the timing of a large capital project in 2017 as it was engineering and retrofitting three wastewater plants. That project did not repeat in 2018.

“We’re not pleased with the segment’s performance, but we have visibility to factors and we anticipate better quarters ahead, as we deliver against the growing backlog that has been focused on aftermarket parts and service across our large install base,” he told analysts.

The company’s products segment, which helps companies and municipalities with environmental compliance through such items as wastewater treatment, enjoyed a 9.5% increase in revenue to $91.7 million. Revenue was boosted by the acquisitions of Olson Irrigation Systems, and Pacific Ozone, a maker of ozone disinfection systems.

Keating said that Evoqua is preparing to roll out its Water One Assurance offering nationwide in September and that the company expects it to add 1,000 basis points to margins within three years.

The program, which was piloted in Birmingham, Ala., and then in Boston, with larger customers, allows companies to outsource their water-treatment systems to Evoqua, which designs, builds and maintains the customer’s on-site water system. Contracts tend to run at least five years and give the company a steady stream of revenue. The company is expecting to spend about $23 million on the three-year rollout.

Stifel analysts said they are sticking with their buy rating on the stock and their $24 price target.

Evoqua shares have fallen 18% in 2018 but have gained 5.2% in the last three months. They are trading at $19.48, up about 8% from their IPO price of $18.

The Invesco S&P Global Water Index CGW, -0.09% has fallen 1% in 2018, while the Invesco Water Resources exchange-traded fund PHO, -0.36% has gained 4.8%.

The S&P 500 SPX, +0.01% has gained 7% in 2018, while the Dow Jones Industrial Average DJIA, -0.15% has gained 3.6%.