American Water Works (AWK) 23Q1 Update

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
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
admin@larkresearch.com

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