UBS has downgraded American Water (AWK, Financial) from a Buy to a Neutral rating, while simultaneously raising its price target for the company from $156 to $160. This decision comes as a result of American Water's stock outperforming its utility peers, leading UBS to reassess its valuation.
The firm expressed concerns about the potential lack of catalysts that could drive the stock higher in the near term. Additionally, UBS highlighted challenges related to the implementation of new rules concerning per- and polyfluoroalkyl substances (PFAS). The complexity of enforcing these rules, particularly across numerous small water systems in the U.S., could result in a slower rollout than anticipated.
Despite the downgrade, the increased price target suggests that UBS still sees some positive aspects to American Water's prospects, albeit with more cautious optimism.
Wall Street Analysts Forecast
Based on the one-year price targets offered by 11 analysts, the average target price for American Water Works Co Inc (AWK, Financial) is $141.92 with a high estimate of $159.00 and a low estimate of $122.00. The average target implies an downside of 2.82% from the current price of $146.04. More detailed estimate data can be found on the American Water Works Co Inc (AWK) Forecast page.
Based on the consensus recommendation from 16 brokerage firms, American Water Works Co Inc's (AWK, Financial) average brokerage recommendation is currently 2.9, indicating "Hold" status. The rating scale ranges from 1 to 5, where 1 signifies Strong Buy, and 5 denotes Sell.
Based on GuruFocus estimates, the estimated GF Value for American Water Works Co Inc (AWK, Financial) in one year is $167.33, suggesting a upside of 14.58% from the current price of $146.04. GF Value is GuruFocus' estimate of the fair value that the stock should be traded at. It is calculated based on the historical multiples the stock has traded at previously, as well as past business growth and the future estimates of the business' performance. More detailed data can be found on the American Water Works Co Inc (AWK) Summary page.
AWK Key Business Developments
Release Date: February 20, 2025
- Earnings Per Share (EPS): $5.39 for 2024, reflecting an 8% growth.
- Weather Impact on EPS: $0.12 per share favorable impact from drier than normal weather.
- Interest Income Impact on EPS: $0.09 per share from the HOS note.
- Capital Investment: Over $3 billion invested in 2024.
- Customer Growth: Nearly 70,000 new customer connections through acquisitions.
- Rate Cases: Seven rate cases completed in 2024, including significant cases in Illinois and California.
- Debt-to-Capital Ratio: 57% at the end of 2024.
- 2025 EPS Guidance: Affirmed at $5.65 to $5.75 per share, representing 8% growth.
- Long-term EPS Growth Target: 7% to 9% through 2029.
- Regulated Rate Base Growth: Expected at 8% to 9% long-term.
- Pipe Replacement: Approximately 400 miles of pipe replaced in 2024.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- American Water Works Co Inc (AWK, Financial) delivered 2024 financial results in line with expectations, achieving earnings of $5.39 per share, reflecting an 8% EPS growth.
- The company successfully completed several significant general rate cases in 2024, driven by necessary infrastructure investments, enhancing service reliability for over 14 million people.
- AWK invested over $3 billion in 2024, including acquisitions that added nearly 70,000 customer connections, meeting their 2% compounded annual growth target.
- The company affirmed its 2025 earnings guidance of $5.65 to $5.75 per share, expecting 8% EPS growth, and maintained a strong financial position with a debt-to-cap ratio of 57%.
- AWK's capital investment program is expected to grow the regulated rate base at a long-term rate of 8% to 9%, with a focus on customer affordability and infrastructure renewal.
Negative Points
- The company faces ongoing challenges with regulatory environments, as seen in California where a full decoupling mechanism was not recognized, prompting a motion for rehearing.
- Operating costs increased by $0.22 per share in 2024, driven by employee-related costs and production costs related to fuel, power, and chemicals.
- AWK's acquisition growth is described as 'lumpy,' with potential delays in closing processes affecting the consistency of customer growth through acquisitions.
- The company anticipates issuing $2.5 billion of external equity from 2025 to 2029, which could be dilutive and is subject to market conditions.
- Despite strong execution, AWK continues to face challenges related to declining water usage per customer, which could impact future revenue growth.
