American Water Works Company Inc.
) is a premier water utility with relatively low risk earnings
growth and an expanding dividend that yields a solid 2.7%.
Positioned in a niche industry with high barriers to entry, this
Zacks #1 Rank (Strong Buy) enjoys near-monopoly status in its area
of operation. On top of this, the utility's best-in-class cost
control and recession-proof business model presents a unique
opportunity to own a safe stock.
Strong 2Q, Guidance Raised
American Water Works reported second quarter earnings per share of
66 cents on August 2, beating the Zacks Consensus Estimate of 49
cents by 35% and the year-ago earnings of 42 cents by 57%.
Revenues of $745.6 million were up 11% year over year from $668.9
million, and also surpassed the Zacks Consensus Estimate of $707.0
million. Results were driven by positive rate relief, favorable
weather conditions, contribution from acquisitions and cost
Based on the impressive start to the year and higher-than-normal
temperatures so far in the third quarter, American Water Works
raised its full year earnings guidance. The utility expects
earnings per share for 2012 between $2.12 and $2.22, up from the
previous guidance of $1.90 to $2.00.
U.S. Shale Boom to Support Future Growth
Investor-owned water utilities like American Water Works are
expected to deliver solid long-term earnings growth, as they take
advantage of the shale gas revolution. In particular, American
Water Works has entered into agreements with energy companies in
the Marcellus shale to supply fresh water - the prime component of
hydraulic fracturing - at their drill sites in the region. The
utility also benefits by providing services to purify contaminated
water, a byproduct of the shale drilling.
Consistent, Secure and Regularly Expanding
American Water Works pays an annual dividend of $1.00 per share,
yielding a solid 2.7%. The utility hiked its dividend payout by
8.7% in May, marking the 4th dividend increase in as many years.
Moreover, the utility's current dividend caps the payout ratio at
less than 50%, slightly below the peer average. This indicates
enough headroom for future dividend increases given its strong
management and solid financial position.
Earnings Estimates Moving Up
Following the second quarter earnings beat, all 14 earnings
estimates for 2012 have moved higher, sending the Zacks Consensus
Estimate up by 23 cents (or 12%) to $2.18.
For 2013, thirteen of 14 estimates moved north in the past 30 days,
helping the Zacks Consensus Estimate advance by 11 cents (or 5%) to
Given the $1.75 per share earned in 2011, the projected growth rate
stands at 24% for 2012.
Shares of American Water are going for about 17.2 times forward
estimates, a 6% discount to the peer group average of 18.4x. Its
price to book ratio of 1.5 is also below what similar firms offer.
The PEG ratio of 2.1, though seemingly overvalued, is again less
than the industry median of 2.9. With the expectation for
consistent growth in earnings and dividend, shares of American
Water Works are set to close the valuation gap to the group.
Market Performance & Technicals
American Water Works operates in an industry where large earnings
surprises are relatively unheard of and, therefore, the stock more
often than not trades at a decent level without wild movements. But
since late-June, shares have been in an upward channel, rising
approximately 14% and setting a new 52-week high in the process. As
hot and dry weather continue to scorch the U.S., the stock looks
poised to add to its gains.
Opportunities for drinking water suppliers like American Water
Works are set to improve, as it captures the economic benefit of
dealing with a natural resource that has no substitute and with a
projected imbalance in future demand/supply.
Founded in 1886, Voorhees, New Jersey-based American Water Works
Company is the largest publicly traded regulated water and
wastewater utility holding company in the U.S., catering to
approximately 15 million residents across the country and parts of
AMER WATER WORK (AWK): Free Stock Analysis
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