American Water Works Company Inc

AWK Details

American Water Works Company Inc (NYSE: AWK) is the largest investor-owned water and wastewater utility company in the United States. It is involved in providing high-quality water and wastewater services to approximately 15 million people in 46 states.

Key Positives:

Increased ROE (18.4% in FY21 vs 11.3% in FY20), Improved Net Margin (32.1% in FY21 vs 18.8% in FY20)

Key Negatives: 

Reduced EBITDA Margin (46.6% in FY21 vs 49.0% in FY20), Higher Debt to Equity Ratio (1.51x in FY21 vs Industry Median at 0.90x)

Key Risks:

Regulatory Risk, Adverse Climatic Conditions, Changes in Customer Demand and Patterns of Usage

Inline Result Performance in FY21 (For the Year Ended 31 December 2021)

• It has recorded earnings per share of $6.95 in FY21, up by $3.04 against the earnings per share in FY20.
• The increase in earnings includes gain of $2.70 per share on sale of HOS along with a $0.40 increase in the Regulated Businesses driven by growth in earnings from infrastructure investment, acquisitions and organic growth.
• The company undertook capital investments worth $1.9 billion in 2021, comprising $1.8 billion mainly towards infrastructure improvements in the Regulated Businesses and $135 million for regulated acquisitions.
• The regulated businesses’ net income stood at $789 million in 2021, compared to $715 million in 2020 and the regulated revenue increased approximately $129 million.

Source: Company Reports, Analysis by Kalkine Group

Recent Update

• On 31 March 2022, the company declared that in the last few months it has fruitfully introduced various new features that will provide its regulated water and wastewater customers with an improved digital customer experience. This will help its customers to self-serve if they choose.
• On 29 March 2022, Missouri American Water, a subsidiary of AWK, mentioned the commencement of a $7.5 million project that entails replacing nearly 15,000 feet (2.8 miles) of water main in Florissant, MO along Harrison Street, Washington Street and St. Catherine Street near New Florissant Road.
• On 24 March 2022, the company announced the retirement of Nick Rowe, senior vice president of American Water and president of Kentucky American Water effective July 31, 2022. AWK has chosen Kathryn Nash as the new president of Kentucky American Water, effective May 2, 2022.

Key Risks

The company’s regulated business is exposed to the risks of extensive regulation by state PUCs and other regulatory agencies. Limitations on availability of water supplies or restrictions on usage of water supplies due to government regulation or action is another key risk. Furter, it is susceptible to the risk of water rates, typically regulated by governmental and regulatory bodies.

Outlook

AWK has reaffirmed 2022 diluted earnings per share guidance range of $4.39 to $4.49. It has also affirmed its long-term financial targets for the 2022-2026 declared in Nov. 2021. This includes a long-term EPS growth target of 7-9% along with forecasts of long-term dividend growth at the high end of a 7-10% range. Besides, the company has strengthened position as a leading Environmental, Social, and Governance investment. The company remains enthusiastic about the positive momentum recorded in 2021 as it further executes on the long-term strategies and targets.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Stock Information                                           

The stock is trading higher than the average of the 52-week high price of $189.65 and the 52-week low price of $144.20.

The stock has been valued using EV/Sales multiple-based illustrative relative valuation and the target price so arrived reflects a fall of low double-digit (in % terms). A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering its high debt profile with the debt-to-equity ratio at 1.51x in FY21 and the associated business risks.

Considering the aforementioned factors, and the current trading levels, we advise the investors to book profits. We give a “Sell” rating on the stock at the current market price of US$168.58 per share, as on 09:37 am New York Time, USA (GMT-4) as of 13 April 2022.

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

American Water Works Company Inc (AWK) is a part of Kalkine’s Global Green Energy Portfolio

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.