AWK reported 22Q3 EPS of $1.63, up 6.5% from $1.53 in 21Q3 and above my estimate of $1.52. Operating revenues decreased 0.9% to $1.08 billion, as regulatory rate increases were more than offset by lost revenues from the sales of the Homeowner Services (HOS) and New York American Water (NYAM) businesses.
Management reaffirmed its 2022 EPS guidance of $4.39-$4.49, its 2022 capital and acquisition expenditure guidance of $2.5 billion and its long-term average annual EPS growth target of 7%-9%. It also initiated 2023 EPS guidance of $4.72-$4.82 and a 5-year capital spending plan of $18 billion for 2023-2027, which is above the upwardly revised 2022-2026 plan of $16 billion. With the increase in planned capital spending, AWK now intends to raise $2.0 billion in equity over the next five years, with most of that likely to occur in 2023, subject to market conditions.
Since my last report on July 30, AWK’s stock has suffered a –10.2% total return vs. the S&P 500’s –7.0% and the Dow Jones Water Utility Index’s estimated ‑11.0%.
The stocks of AWK and its peers have endured greater multiple compression than the broader market, as the recent and expected future increases in interest rates have weighed more heavily on their high P/E multiples. Since the end of July, AWK’s forward 2022 P/E multiple has declined from 35 to 31. Its peers have suffered similar declines.
Based upon those forward multiple declines, I am reducing my price target for AWK’s stock to $149 (from $168 previously). The new price target equates to a multiple of 31 times projected 2023 EPS of $4.80. It represents a potential total return of 9% from the current share price, including the 1.9% dividend yield. I am also maintaining my neutral rating on the stock.
Owing to its defensive qualities and barring a significant change in its fundamentals, AWK’s stock will likely continue to carry a premium valuation to the broader market. With this year’s price decline and the reaffirmation of its earnings growth outlook, I believe that there will be an attractive investment opportunity in AWK’s stock as the FOMC’s policy tightening nears its end and when the company comes to market with its equity offering.
This is a summary of my recent update report on American Water Works Company (AWK). To obtain a copy of the full report, reach out to me using the contact information provided below.
November 4, 2022
Stephen P. Percoco
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
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