AWK reported 23Q1 EPS of $0.91, compared with $0.87 in 22Q1 and my estimate of $0.83. Operating revenues increased 11.4% to $938 million. Billed water service volumes increased 0.4%, with gains among industrial and commercial customers more than offsetting a 1.0% decline in residential volume. The implied average price of water service rose 8.4%, due mostly to $279 million in rate cases and infrastructure charges that became effective after Jan. 1. Operating expenses increased 4.8% due primarily to inflationary pressures which raised the cost of fuel, power and chemicals. Operating income increased 19.9% to $295 million, but that was partially offset be a 15% increase in interest expense, lower pension income and a 150 bp increase in the effective tax rate. Net income rose 7.6% to $170 million, but a higher share count, due to the successful $1.7 billion equity offering in March, restricted the increase in diluted EPS to $5.3% or $0.91 per share.
With the equity offering, AWK paid down all of its outstanding commercial paper. Its ratio of debt-to-total capitalization was 54.0% at 23Q1, down from 61.7% at 22Q4. The offering gives AWK a sufficient equity base to continue pursuing its ambitious capital spending program, which for this year totals $2.9 billion, including $400 million of acquisitions. At quarter end, $550 million of acquisitions were pending.
Management reaffirmed its 2023 EPS guidance of $4.72-$4.82. With the better-than-expected 23Q1 results, I have raised my 2023 EPS estimate from $4.67 to $4.76 and my 2024 estimate from $5.03 to $5.15. My 2024 EPS estimate equates to growth of 8.3%, within the company’s long-term guidance range of 7%-9% annual EPS growth.
Based mostly upon the increase in EPS estimates and the stock’s forward multiple expansion (since my previous report), I have raised my price target for AWK’s stock from $151 to $161. The price target applies a valuation multiple of 31.2, equal to AWK’s current one-year forward multiple, to projected 2024 EPS of $5.15. At the new price target, the potential total return on AWK’s stock, including its 1.9% dividend yield, is 10.4%. Accordingly, I am maintaining my performance rating at “2” (Outperform). AWK may be a good defensive choice in a slowing economy with moderating interest rates and inflation.
This is a summary of my recent 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.
April 28, 2023
Stephen P. Percoco
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
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