On Friday, BofA Securities announced the resumption of its coverage on American Water (NYSE:AWK) Works Company, Inc. (NYSE:AWK), assigning an underperform rating to the stock with a price target of $140.00. The coverage reinitiation comes after a period during which American Water Works notably outperformed regulated electric and gas utilities, benefiting from low interest rates that contributed to its high valuation relative to its peers.
BofA Securities noted that American Water Works' relative premiums had reached approximately 90% compared to regulated gas and electric utilities. However, the trend saw a sharp reversal in 2022 as interest rates increased, and the difference in the company's historical earnings per share (EPS) growth rates began to align more closely with those of regulated electric and gas utilities.
The firm pointed out that despite these changes, American Water Works still maintains a 45% relative price-to-earnings (P/E) premium over its electric and gas utility counterparts. BofA Securities considers this premium higher than what they believe is justifiable. In contrast, the firm indicated a preference for water utility companies with more reasonable valuations, such as Essential Utilities Inc. (NYSE:NYSE:WTRG).
In their analysis, BofA Securities projected EPS for American Water Works for the years 2024, 2025, and 2026, estimating figures of $5.28, $5.70, and $6.12, respectively. This forward-looking EPS guidance is part of the firm's rationale for the underperform rating and the set price target for the company's shares.
In other recent news, American Water Works Company has reported significant developments. The company has settled a New Jersey rate case resulting in a $79.5 million annual increase in water and wastewater revenues. This comes after their subsidiary, New Jersey American Water, initially sought an additional $161.7 million in annualized revenues. The settlement, based on a return on equity of 9.6% and an authorized rate base of $5.05 billion, is expected to be approved at a public meeting on September 4, 2024.
In the financial realm, American Water Works has demonstrated a robust performance in the second quarter and first half of 2024, despite a minor decrease in quarterly earnings per share (EPS). The company has raised its EPS guidance for 2024 to $5.25-$5.30, indicating a positive financial outlook. Investments in capital projects have reached $1.4 billion year-to-date, and the company has added 43,000 customers through acquisitions and organic growth.
In terms of leadership, John Bigelow has been announced as the new President. Despite potential legal challenges in Pennsylvania that could affect the timing of benefits from acquisitions, American Water has secured $266 million in annualized new revenues and rates, with total annualized revenue requests pending at $546 million. The company's long-term targets, including a 7%-9% earnings and dividend growth over five years, remain affirmed.
InvestingPro Insights
As American Water Works Company, Inc. (NYSE:AWK) navigates the evolving utility landscape, real-time data from InvestingPro provides a comprehensive view of the company's financial health. With a market capitalization of $29.05 billion and a P/E ratio standing at 30.51, the company showcases a robust stature in the market. Despite BofA Securities' concerns about valuation, it's worth noting that American Water Works has experienced a revenue growth of 7.68% over the last twelve months as of Q2 2024, which may underpin the company's premium valuation relative to its peers.
InvestingPro Tips suggest that American Water Works has a track record of raising its dividend for 10 consecutive years, indicating a strong commitment to returning value to shareholders. Additionally, five analysts have revised their earnings upwards for the upcoming period, reflecting a positive sentiment around the company's future performance. For investors seeking more insights, InvestingPro offers numerous additional tips that can be explored at https://www.investing.com/pro/AWK.
With American Water Works trading near its 52-week high and showing a price uptick of 27.52% over the last six months, the company's stock performance reflects investor confidence. However, it is also trading at a high earnings multiple, which is a point of caution for value-oriented investors. As the market continues to assess the company's growth prospects and valuation, these InvestingPro metrics and tips provide a valuable context for evaluating American Water Works' investment potential.
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