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American Water Gains from Investments, Regulations a Woe

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On Jan 2, we issued an updated research report on American Water Works Company, Inc. (AWK - Free Report) . The company is benefiting from its systematic investments in regulated operations and contribution from acquired assets. However, stringent regulations and fluctuating weather patterns are persistent headwinds.

American Water Works has expanded its market footprint through strategic acquisitions. During the first nine months of 2016, the company added 10,700 customers to its existing base through buyouts. Going ahead, the company aims to boost its total customer base by another 78,500 through this strategy. Its pending acquisitions are expected to add 67,800 customers and are presently in various stages of the approval process.

We all need 24x7 reliable water and wastewater services at reasonable costs. However, the cost of maintaining and upgrading aged wastewater systems is going up. This makes it an uphill task for small local operators to keep up with the rising expenses of upgrading the existing water infrastructure. So, consolidation is the need of the hour in the fragmented U.S. water utility space. Another water utility Aqua America Inc. is on the consolidation path.

American Water Works aims to invest $6.4 billion in the 2016–2020 time frame, which will bolster its earnings by 7% to 10% per year during this period. The lion’s share of $5.5 billion will be directed to strengthen its regulated businesses. Note that more than 90% of its net income is derived from regulated operations.

On the flip side, American Water Works needs to comply with increasingly stringent laws and regulations that could increase its operating costs. Supplied water is subject to extensive environmental, quality, and health and safety laws and regulations. Violations of these mandates could lead the company to incur substantial liabilities and costs.

Price Movement

Over the last one year, American Water Works has underperformed the Zacks categorized Utility – Water Supply industry. During this period, the company’s shares gained 19.9%, compared with the industry’s return of 27.9%.

Rising interest levels and increasingly stringent credit markets might make it difficult for the company to get the necessary or desired amount to fund capital improvements on favorable terms.

Zacks Rank & Key Picks

American Water Works currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same space are Global Water Resources, Inc. (GWRS - Free Report) and The York Water Company (YORW - Free Report) . Both the companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Global Water Resources’ 2017 estimates improved 30% to 13 cents from 10 cents over the last 60 days. Shares of the company gained 45.6% in the last 12 months, outperforming the broader industry.

The York Water Company’s 2017 estimates inched up 0.9% to $1.03 from $1.02 over the last 60 days. Its shares gained 54.3% in the last 12 months, outperforming the broader industry.

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