2021 Second Quarter Results in Line with Expectations. Maintaining Neutral Rating.
AWK reported 21Q2 EPS of $1.14, up 17.5% from 20Q2. Operating revenues increased 7.3% to $999 million. Operating income rose 5.4% to $330 million. Operating margin eased 60 bp from 33.6% to 33.0%, due to a refund of excess accumulated deferred income tax. That refund was offset by a comparable drop in income tax expense, as evidenced by the drop in the effective tax rate from 24.1% to 17.5%. Thus, net income increased 17.6% to $207 million.
Management reaffirmed its full year guidance of $4.18-$4.28 per share. It reaffirmed its 2021 capital expenditure guidance of $1.9 billion and its five-year capital spending plan of $10.4 billion. It also reaffirmed its long-term target of 7%-9% average annual EPS growth.
American Water’s stock has delivered a total return of 15% year-to-date, modestly behind the S&P 500’s 18.4%. Still, AWK has outperformed the S&P over the past three, five and ten years.
That outperformance is due to a combination of moderate EPS growth, averaging just under 10%, combined with steady multiple expansion. At the current price, AWK shares are valued at 41 times projected 2021 EPS of $4.23. That is high, especially for a stock with modest EPS growth expectations; but the multiple is only moderately above the peer group average. Investors seeking income and safety have bid up the shares of water utilities, especially AWK, which is the only one with a large equity capitalization.
Going forward, it is difficult to predict either a further expansion or an eventual contraction in AWK’s valuation multiple. If and when a contraction comes, it will most likely be driven at first by market- rather than company-specific events. If AWK can continue to achieve its long-term EPS growth targets, the stock should deliver an annualized return of 8.4%-10.4%, equal to the 7%-9% growth in EPS plus the 1.4% dividend yield, assuming no change in the valuation multiple. That should be roughly comparable to the average return on the S&P 500. Accordingly, my one-year price target for AWK is $190, up 8% from the current quote.
Note: This is a summary of my report dated August 4, 2021. To obtain a copy of the report, please contact us.
August 6, 2021
Stephen P. Percoco
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