American Water Works (AWK) 23Q3 Update

AWK reported 23Q3 EPS of $1.44, up from $1.63 in 22Q3 and my estimate of $1.61.  This quarter’s results included a $0.04 benefit from warm, dry weather.  22Q3’s weather benefit was $0.06.  Operating revenues increased 7.9% to $1.17 billion.  Billed water service volumes declined 2.5%.  The implied average price of water service rose 10.7%, mostly because of rate cases and infrastructure charges that became effective after Jan. 1.  Operating and maintenance expenses increased 3.7%, as the O&M cost ratio declined 100 bp to 32.6%.  Operating income rose 8.9% to $478 million, with a similar increase in net income.  As a result of the higher share count following March’s $1.7 billion equity issuance, EPS grew 1.5%.

Management reaffirmed its 2023 EPS guidance of $4.72-$4.82.  With the solid 23Q3 performance, AWK’s results are tracking toward the high end of that range.  In fact, my estimate for full year 2023 EPS is unchanged at $4.86.  Management has set its initial EPS guidance for 2024 at $5.10-$5.20.  My projections for 2024 are also unchanged at $5.19.  AWK also reaffirmed its long-term annual EPS growth estimates of 7%-9%.  It anticipates capital spending of $3.1 billion in 2024, up from a projected $2.8 billion of 2023

Since my last report, AWK’s stock has fallen 6.2%, worse than the S&P 500’s 2.2% decline, but in line with the Dow Jones Water Utility index’s 7.3% slide.  The surge in water utility stocks over the past few days suggests that the decline has been due mostly to multiple compression associated with the recent rise in interest rates.  (The surge in stocks over the past few days is a relief rally as interest rates have moderated in the face of economic data suggesting that the economy is slowing.)

Because of the recent drop in AWK’s stock and the general decline in water utility forward valuation multiples, I am lowering my price target to $150 from $161.  That implies a forward valuation multiple of 29 times projected 2024 EPS of $5.19, slightly above the current peer group average of 28.  At the PT, the potential total return, including its 2.3% dividend yield, is 17.7%.  Accordingly, I am maintaining my performance rating to “1” (Buy).  Although AWK (along with the entire utility sector) has underperformed the broader market this year, I believe that its stock is a good defensive choice in a slowing economy.

This is a summary of my recent update report on American Water Works Company (AWK). To obtain a copy of the full report, please reach out to me using the contact information provide below.

November 8, 2023 (Originally published on November 3, 2023)

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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