American Water Works (24Q1) Update

AWK reported 24Q1 EPS of $0.95, up from $0.91 in 23Q1.  Consensus was $0.97.  This quarter’s results included a $0.02 benefit from an increase in interest income on the Home Services Group seller note.  Operating revenues rose 7.8% to $1.01 billion.  Billed water service volumes were flat.  Operating and maintenance expenses increased 5.9%, mostly due to higher purchased water usage and fuel, power and chemicals costs.  Operating income rose 10.5% to $326 million.  Other expense, including interest expense, rose, while the effective tax rate increased 300 bp to 23.6%.  Net income increased 8.8% and EPS rose 3.8%, due to a higher share count from last year’s equity offering.

Management raised its 2024 EPS guidance by $0.10 to $5.20-$5.30.  The increase is due entirely to higher expected interest income on the Home Services Group note from an increase in its interest rate from 7% to 10% and in principal from booking a $75 million contingent cash payment to $795 million.

YTD, AWK’s stock is down 2.1%, worse than the S&P 500’s 15% rise, but in line with the Dow Jones Water Utility index’s 1.4% slide.  The stock bottomed in mid-April with the broader market when interest rates peaked and then surged nearly 20% over the next three weeks.  Since then, it has given back some of those gains.  AWK has outperformed peers since the end of March.  The entire water utility sector has continued to suffer multiple compression as interest rates have risen.

As a result of that multiple compression, I am lowering my price target from $150 to $142.  That implies a forward valuation multiple of 25 times projected 2025 EPS of $5.62, slightly above AWK’s current one-year forward multiple of 24.5, but above the peer group average of 20.  At the PT, the potential total return, including the 2.5% dividend yield, is 12.4%.  Accordingly, I am lowering my performance rating to “2” (Outperform) from “1” (Buy).

An ongoing concern is the potential for state regulators to push back harder on proposed rate increases to avoid placing extra burdens on consumers.  For example, AWK may have to go to court to settle a pending rate increase request in Pennsylvania.  Yet, the company is optimistic about resolving this case.  In order to address regulators’ concerns in all of its markets, it is seeking to limit customer bills to no more than 1% of median household income and pursuing creative rate structures to cap costs for lower income consumers.

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

June 30, 2024 (Report published on June 27, 2024.)

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

© 2015-2024 by Stephen P. Percoco, Lark Research.   All rights reserved.

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