AWK reported 24Q2 EPS of $1.42, down from $1.44 in 23Q2 and below my estimate of $1.48. Operating revenues rose 4.7% to $1.14 billion. Billed water service volumes declined 0.4%, but this was more than offset by an estimated 5.3% increase in average prices. Operating and maintenance expenses increased 3.2%, mostly due to higher purchased water cost and usage, increased employee-related costs and higher other operating expenses. Operating income rose 3.9% to $449 million; but the increase was offset by higher interest costs and a higher effective tax rate. Net income decreased 1.1%.
Nevertheless, management raised its 2024 EPS outlook by narrowing it to the top half of its guidance range. It now expects 2024 EPS of $5.25-$5.30. The change is due to lower than previously expected declines in customer usage plus the benefit of recent rate increases. Although 24Q2 EPS was $0.06 below my estimate, I have lowered my 2024 EPS outlook by only $0.01 to $5.27, keeping it within management’s guidance range. For 2025, my EPS projection of $5.67 is unchanged.
Since my last report on June 17, YTD, AWK’s stock has delivered a 10.4% total return compared with the S&P 500’s 5.3% decline. As a result, the stock’s YTD performance is now only 25 bp below the S&P 500’s 9.6% gain and ahead of the Dow Jones Water Utility index’s 8.3% advance. AWK’s and its peers’ strong outperformance over the past five weeks is due to multiple expansion prompted by falling interest rates.
As a result of that multiple expansion, I am raising my price target from $142 to $152. The new PT implies a forward valuation multiple of 27 times projected 2025 EPS of $5.62, in line with AWK’s current one-year forward multiple, but above the peer group average of 23. At the PT, the potential total return, including the 2.3% dividend yield, is 8.8%. Accordingly, I am lowering my performance rating from “2” (Outperform) from “3” (Neutral).
AWK announced in July that it had settled its rate case in Pennsylvania. That settlement had been called into question when regulators appeared to tie the approval of the pending acquisition of the Butler Area Sewer Authority to the rate case. The Commission approved 100% of the capital that has and will be invested until the upcoming June 30, 2025 test year. Management was pleased with the settlement, but disappointed with the awarded 9.45% ROE, which was below its requested 10.95%. Although it plans to press for what it believes is a fair rate of return, its ROE target is high relative to industry norms.
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.
August 7, 2024. (Report published on August 6, 2024.)
Stephen P. Percoco
Lark Research
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Linden, New Jersey 07036
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