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Investments & Customer Additions Aid American Water (AWK)

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American Water Works (AWK - Free Report) is benefiting from planned capital expenditure to strengthen its infrastructure, which will enable it to provide efficient water and wastewater services to the expanding customer base.

This Zacks Rank #3 (Hold) stock delivered an earnings surprise of 2.5%, on average, in the last four quarters. The company’s long-term (three to five years) earnings growth is currently projected at 8.1%. The Zacks Consensus Estimate for 2021 earnings has moved up 0.2% in the past 60 days to $4.25 per share.

Tailwinds

American Water has plans to invest $8.8-$9.4 billion in the 2020-2024 time period and $20-$22 billion in the next decade. American Water has maintained the five-year adjusted EPS compound annual growth rate of 7-10%. More than 85% of its net income is generated from regulated operations. Another water utility, Essential Utilities (WTRG - Free Report) is also making regular investments to upgrade the existing water and wastewater systems. Its long-term plan is to invest $2.8 billion in the 2020-2022 time period to rehabilitate and strengthen the water and natural gas pipeline system.

The company is expanding the customer base through organic initiatives and acquisitions. In 2018 and 2019, it added 25,000 and 67,000 new customers, respectively, in the regulated business through organic growth as well as acquisitions. Till Nov 3, American Water added 47,100 customers to the existing customer base, out of which 10,900 customers were added through the organic route. The company continues to make regular investments to strengthen existing operations. The 25 pending acquisitions as of Nov 3, 2020 — on completion — are expected to add 19,000 customers to its customer base.

The company continues to improve operational efficiency. It has been successful in lowering the O&M efficiency ratio through systematic cost savings and increase in revenues. Notably, the O&M efficiency ratio is the company’s regulated O&M expenses divided by operating revenues. It lowered the O&M efficiency from 46.1% in 2010 to 35.6% in 2018. For the past 12-month period ended Sep 30, 2020, the company’s adjusted regulated O&M efficiency improved to 34.2% from 34.8% in the comparable period of 2019. It targets to lower O&M efficiency to 31.3% in 2024.

Headwinds

Improvement in the existing water infrastructure requires huge capital investments. A major portion of the existing water lines and main lines is nearing the end of effective usage life. The company plans to invest billions of dollars over the long term to maintain the integrity of its systems. If the company fails to generate the desired returns due to the ongoing economic crisis, its margins could be hampered.

Moreover, in this adverse economic condition caused by the COVID-19 outbreak, the loss of one or more large industrial or commercial customers could have a material adverse impact on operational results.

Price Performance

Shares of American Water have outperformed the industry in the past six months.

Stocks to Consider

A couple of better-ranked stocks in the same industry include California Water Service Group (CWT - Free Report) and Primo Water Corporation (PRMW - Free Report) . California Water Service sports a Zacks Rank #1 (Strong Buy) and Primo Water carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

California Water Service delivered an earnings surprise of 70.2 in the last reported quarter. The Zacks Consensus Estimate for its 2020 earnings has moved 25.5% upward to $1.77 per share in the past 60 days.

Primo Water delivered an earnings surprise of 65%, on average, in the last four quarters. The Zacks Consensus Estimate for its 2020 earnings has moved 20.9% upward to 52 cents per share in the past 60 days.

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