American Water Works (AWK) 22Q4 Update

AWK reported 22Q4 EPS of $0.81, compared with $3.56 in 21Q4 (or $0.86 excluding a $2.70 gain for the sale of the Homeowner Services (HOS) business).  Operating revenues decreased 2.1% to $931 million.  Besides the sale of HOS, 22Q4’s lower revenues and earnings were due in part to the sale of New York American Water.  My 22Q4 estimate was $0.78.  An 18.6% increase in operating income was more than offset by higher net interest expense, a negative swing in other income (expense) and higher income tax expense (net of the HOS gain on sale).

Last week, the company completed a secondary offering for the issuance of 11 million common shares at a price of $139.50 each, raising $1.47 billion, net of underwriters’ discount.  The offering was larger than I had anticipated.  Consequently, I have adjusted my projection model for 2023, reducing my EPS forecast from $4.80 to $4.67, based upon more shares offered, a lower-than-anticipated share price and other gives and takes.  For 2024, I have set an EPS forecast of $5.03, which represents an increase of 7.7% over projected 2023 EPS, in line with the company’s long-term guidance of 7%-9% annual EPS growth.

About two weeks prior to the share offering, management reaffirmed its 2023 EPS guidance of $4.72-$4.82.  That guidance included an adjustment for an expected offering, but my analysis suggests that the amount anticipated for dilution was below the actual amount of dilution; so without other positive adjustments, it would not surprise me to see management reduce its 2023 EPS guidance by as much as $0.10 to $4.62-$4.72.

Despite my lower 2023 EPS forecast, I have raised my price target for AWK’s stock from $149 to $151.  The price target applies a valuation multiple of 30, equal to AWK’s current one-year multiple, to projected 2024 EPS of $5.03.  At the new price target, the potential total return on AWK’s stock, including its 1.9% dividend yield, is about 10%.  Accordingly, I am raising my performance rating on the stock from “3” neutral to “2” outperform.

This is a summary of my recent 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.

March 8, 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.

This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.

This entry was posted in AWK, Utilities and tagged , . Bookmark the permalink.