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American Water (AWK) Gains From Investment & Acquisitions

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American Water Works Company (AWK - Free Report) continues to provide water and wastewater services to more than 15 million customers in the United States. The company’s systematic investments to strengthen infrastructure and strategic acquisitions continue to strengthen its position in the industry.

The company delivered an average surprise of 1.7% in the last four quarters. The Zacks Consensus Estimate for 2021 earnings per share has moved up 1.2% to $4.24 in the past 60 days. It currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tailwinds

American Water has plans to invest $10.4 billion in the 2021-2025 time period and $22-$25 billion in the next decade. In 2021, the company is on course to make capital investments of nearly $1.9 billion, with a major portion to be utilized for infrastructure improvements in Regulated Businesses.

Its capital investment is backed up by rate revision by the commission, per application from the company. American Water has been benefiting from rate increase. New rates effective since Jan 1, 2021 will add $123 million to annual revenues. The pending rate case, if approved without any change, will further increase the top line by $61 million. The ongoing expansion of the rate base will have a positive impact on its earnings over the long term.

Consolidation is the need of the hour in the fragmented U.S. water utility space and American Water continues to widen market footprint through strategic acquisitions. From the start of the year till May 1, 2021, the company expanded the customer base by 4,500 through organic means and acquisitions. Its pending 32 acquisitions (as of May 1), when completed, will add another 86,000 customers to the customer base. Since 2015, the company has successfully acquired 62 water utilities and 44 wastewater utilities, which added 211,000 customers to the existing customer base.

Headwinds

Despite the ongoing upgrades, a major portion of the existing water lines and mainline is nearing the end of their effective usage life, which increases the possibility of breakage of water main and creates disruption in water services.

Weather fluctuation plays a significant role in the increase/decrease in the demand for fresh water and wastewater services. Unfavorable weather conditions in summer months can lower profitability.

Price Performance

Shares of American Water have outperformed the industry in the past year.

Zacks Investment ResearchImage Source: Zacks Investment Research

Investments in Water Space

Per the findings of the American Society of Civil Engineers, water main breaks occur every two minutes in the United States due to aging of the existing water infrastructure. Pipeline breaks result in the wastage of 6 billion gallons of potable water each day and add to the loss of water utility operators. The pipeline breaks not only increase the cost of water services but also expose it to the possibility of contamination.

Per the Water and Wastewater Equipment Manufacturers Association, an estimated $750 billion investment is necessary to maintain and expand drinking water as well as wastewater services to meet demand over the next 20 years.

Water utility California Water Service (CWT - Free Report) plans to invest in the range of $270-$300 million in 2021 to strengthen its water and wastewater infrastructure. Another water utility, Middlesex Water (MSEX - Free Report) — under the Water for Tomorrow program — is making regular capital investments to enhance system reliability, resiliency and overall service quality. 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 nearly $3 billion through 2023 to rehabilitate, and strengthen water as well as natural gas pipeline systems.

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