‘They sure make a lot of money’ (July 18, 2015)

I was playing tennis the other day with a guy who seemed pretty savvy about finance and investing. A couple of us got to talking about the Town of Apple Valley’s rule-or-ruin jihad against Apple Valley Ranchos Water Company, and this guy chimed in with, They (Ranchos) sure make a lot of money. We were on a change-over so time was limited, but we pointed out a couple of factors he may not have considered and went on with our game.

But that got me to thinking about what kind of money AVRWC is making, compared to other investment opportunities. After all, the TOAV makes a huge deal about AVRWC’s nine percent profit, so I decided to look into it.

A quick search lead me to the Industry Summary page at biz.yahoo.com. Sure enough, it lists Water Utilities, which in terms of return on investment is 144th out of 186.

Right off the bat, that doesn’t seem a terribly good investment, but let’s compare it with the top two in terms of return on investment: Hospitals and auto parts stores. Auto parts stores turn out to be a particularly good comparison, because TOAV council member Scott Nassif owns four auto parts stores, and he is adamant that AVRWC is putting profits ahead of people, with their mind-bogglingly-high nine percent profit.

So here are the numbers (as of July 10, 2015):

# Industry P/E ROE % Debt to Equity
1 Hospitals 25.70 71.00 76.48
2 Auto Parts Stores 23.90 70.90 68.35
144 Water Utilities 20.60 8.60 389.75

The price-per-earnings number is about the same for each of these three. But return on investment is more than eight times higher for an auto parts store than for a water utility. The high debt-to-equity ratio tells me that it costs a lot of money to make money in the water utility business. The money that it takes to build and maintain a water system is an investment in our community, and considering how much money is required, we’re lucky to have outside partners to help us.

The Industry Summary at Yahoo also establishes that the average net profit margin for water utilities is 12.10 percent, which puts AVRWC well below average on that basis as well.

All together, these numbers show there’s nothing extraordinary about the way AVRWC does business. In fact, they show that water utility operators have to invest millions before they are in a position to sell a product that has to be pure, and which people absolutely have to have, for less than two cents a gallon.

Greg Raven is Co-Chair of Apple Valley Citizens for Government Accountability, and is concerned about quality of life issues.