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American Water to Invest $20-$22B to Fortify Infrastructure

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American Water Works Company AWK announced long-term capital investment plans that are aimed at strengthening, and expanding its existing water and wastewater infrastructure. The company increased regulated infrastructure investment by $800 million for the 2020-2024 capital plan and introduced a 10-year capital spending plan at a range of $20-$22 billion.

American Water maintained five-year adjusted EPS compound annual growth rate of 7-10% and issued its 2020 earnings per share guidance in the range of $3.79-$.3.89. The midpoint of the guided range is $3.84, lower than the Zacks Consensus Estimate of $3.90 per share for 2020.

Regular Investments are Essential

Per U.S. Environmental Protection Agency estimates, more than $744 billion is needed for water and wastewater infrastructure improvement in the country. Since government funding is not expected to increase dramatically in the near term, regulated companies in the water space will have to take initiatives for upgrading water and wastewater infrastructure to control and check wastage. This will require systematic investments from regulated water utilities of the United States.

American Water is a pioneer in this regard and has been investing consistently to upgrade and replace old and soiled water mains, and add new lines to serve customers more efficiently. Another water utility Aqua America Inc. announced that it is going to invest nearly $550 million in 2019 to strengthen its water and wastewater infrastructure. This will be part of Aqua America’s investment target of more than $1.4 billion in the 2019-2021 time period.

Water utility SABESP SBS also intends to spend roughly R$18.7 billion to improve services over the period of 2019-2023. Of the total spending, it plans to spend R$7.8 billion, R$8.3 billion and R$2.6 billion on water, sewage collection and sewage treatment, respectively.

Fragmented Water Industry a Woe

The U.S. water industry is highly fragmented and creates operational challenges for small operators. At present, more than 53,000 water systems in the United States are providing water solutions to customers. Only 7% of the country’s systems serve a population of more than 10,000 and a mere 1% serve in excess of 100,000 people. As a consequence, it becomes very difficult for small operators to make regular investments to upgrade and repair the aging infrastructure.

Per an American Water Works Association report, more than 200,000 water lines break per year in the United States, resulting in 7 billion gallons of water leaking out of aging pipes. Prevention of water could only be possible through investments and consolidation.

Acquisition of small water utilities by bigger companies is ensuring the extension of high-quality services to customers and upgrade of assets of small service providers. Generally, large water utilities have better financial strength to carry out the necessary investments.

American Water, which is one of the most active players in the water space, has already completed a few acquisitions in 2019. Global Water Resources, Inc. GWRS, among other water utilities, is also following the acquisition route to expand operations.

Price Performance

Shares of American Water have outperformed the industry in the past 24 months.

Zacks Rank

Currently, American Water has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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