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
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
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