American Water Works 23Q2 Update

AWK reported 23Q2 EPS of $1.44, up from $1.20 in 22Q2 and my estimate of $1.18.  This quarter’s results included a $0.07 benefit from warm, dry weather.  Operating revenues increased 17.1% to $1.1 billion.  Billed water service volumes increased 3.7%, with gains of 6.0% in residential and 9.2% in public more than offsetting a 9.4% decline in industrial.  The implied average price of water service rose 10.5%, mostly because of $340 million in rate cases and infrastructure charges that became effective after Jan. 1.  Operating and maintenance expenses increased 11.4%, slower than revenues, due to continuing inflationary pressures. The O&M cost ratio therefore declined by 190 bp to 38.2%.  Operating income jumped 32.1% to $43 million, but a higher effective tax rate limited net income growth to a still strong 28.4%.  With a higher share count from March’s $1.7 billion equity issuance, EPS grew 20%.

At quarter end, American Water Capital Corp., the financing arm of AWK, issued in a private placement $1.035 billion aggregate principal amount of 3.625% Exchangeable Senior Notes due June 15, 2026.  Net proceeds after discounts and expenses were $1.022 billion.  The Notes are exchangeable at an initial price of $171.78 per share or 5.8213 shares of AWK common stock for every $1,000 principal amount of Notes.  There are limitations on exchanging the Notes into common stock until March 15, 2026.  The Notes are also non-callable.  With this debt offering, AWK completed its 2023 financing plan.

Management reaffirmed its 2023 EPS guidance of $4.72-$4.82.  With the solid 23Q2 results, I have once again raised my 2023 EPS estimate, this time from $4.76 to $4.86 (which includes the $0.07 weather benefit).  I have also raised my 2024 estimate from $5.15 to $5.19.  My 2024 EPS estimate equates to growth of 8.4% (from a base of $4.79), which is within AWK’s long-term EPS guidance range of 7%-9%.

My $161 price target applies a forward valuation multiple of 31 to projected 2024 EPS of $5.19.  That multiple is above the peer group average of 28; but AWK is a better relative investment, in my view, because of its substantially larger market presence and equity capitalization.  At the PT, the potential total return, including its 2.2% dividend yield, is 17.0%.  Accordingly, I am raising my performance rating to “1” (Buy).  Although AWK (along with the entire utility sector) has underperformed the market significantly this year, its stock is a good defensive choice in an overextended market and slowing economy.

This is a summary of my recent report on American Water Works Company (AWK), originally published on August 12, 2023. To obtain a copy of the full report, please reach out to me using the contact information provided below.

August 17, 2023

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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