American Water Works Company, Inc.

AWK Details

American Water Works Company, Inc. (NYSE: AWK) primarily operates in regulated markets and offers water and wastewater services to residential, commercial, and industrial clients. Water services for military sites, provided under long-term contracts, are the company's sole unregulated operation. With around 3.5 million customers across 16 states, American Water Works claims to be the biggest investor-owned water and wastewater company in the United States.

Latest News:

• First Grant Program: Missouri American Water announced the First Annual Hydration Station Grant Program Recipients on June 22, 2022.
• Announcement for Water Storage Plans in 2022: Pennsylvania American Water stated on June 14, 2022, that it renovated 14 existing water storage tanks and built seven new ones. The overall business will spend around USD 16.5 million on water storage upgrades.
• Collaborations for Clean Energy Infra-Projects: On June 10, 2022, California American Water and Rentricity collaborated on a clean energy infrastructure project in the district that serves San Diego County.
• Recent Acquisition: On June 7, 2022, Illinois American Water acquired the water and wastewater systems of the Village of Hardin. The recently purchased system expands the company's southern Illinois service region by around 435 water and 405 wastewater customers.

Q1 FY22 Results:

• Top-Line Growth: Subject to strict control over operating and maintenance expenses, the company's operating income was USD 246 million compared to USD 229 million, yielding an operating margin of 29.2% in Q1 FY22 vs 25.8% in Q1 FY21. Additionally, operating revenue decreased from USD 888 million in Q1 FY21 to USD 842 million in Q1 FY22.
• Growth in Profitability and Dividend Profile: As a result of increased infrastructure investment, the company's net income climbed from USD 133 million in Q1 FY21 to USD 158 million in Q1 FY22, contributing to a 19% rise in EPS. The business has increased dividend payments for 14 years and currently paid USD 0.655 on June 1, 2022. A dividend growth chart was also displayed.

   (Source: Company Filings)

• Capital Investment Plan and Collaborations: AWK is on pace to invest around USD 2.5 billion in 2022 after investing USD 430 million in Q1 FY22 compared to USD 336 million in Q1 FY21. With 45000 close customer connections, AWK is set to complete the greatest purchase in Pennsylvania American water history. It has already completed the acquisition of Illinois and Missouri.
  

FY 2022 Outlook:

• EPS Guidance: The company maintains its USD 4.39 to USD 4.49 earnings per share estimate range for 2022.
• Dividend Targets: The business anticipated its long-term dividend growth to be at the high end of 7 to 10%.

Key Risks:

• Regulatory Lag Risk: Between the time it invests in infrastructure upgrades, incurs increased operational expenditures owing to inflation or other causes, and increases in the cost of capital, there may be a large delay due to the existing regulatory rate-setting procedure, often known as "regulatory lag." The inability to respond to these occurrences quickly may raise the risk of a lawsuit.
• Water Supply and Service Contamination: Water supply or customer service contamination could lead to service restrictions, interruptions, and exposure to substances not typically present in potable water supplies. It could also lead to usage restrictions, responsive obligations, government enforcement, and private legal action.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Source: Analysis by Kalkine Group)

Stock Recommendation:

Through acquisitions and organic expansion, AWK has successfully gained 5500 new client connections this year, and its earnings outlook is positive. The stock's 52-week trading range is between USD 189.65 and USD 129.45.

Based on the stable margins with an increase in interest and non-interest income, robust loan growth, associated risks, and current valuation, we recommend a "Hold" rating on the stock at the closing market price of USD 137.01 as of June 22, 2022.

1-Year Technical Price Chart (as of June 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.