American Water Earnings: New Investment Opportunities Identified; Shares Attractive

We are reaffirming our $137 per share fair value estimate after American Water AWK reported third-quarter operating earnings of $1.66 per share, compared with $1.63 in the same year-ago period. Management reaffirmed its 2023 EPS guidance range of $4.72 to $4.82, in line with our expectations.

Management initiated 2024 EPS guidance of $5.10 to $5.20, in line with our $5.15 estimate. Management also reaffirmed and extended their long-term 7%-9% earnings growth and dividend growth outlook through 2028. Our earnings outlook through 2027 is at the midpoint of this guidance.

At the beginning of the year, we viewed American Water as 18% overvalued. With the stock down 22% year to date, far outpacing the utilities sector 16% decline, we now view shares as attractive, trading at a 10% discount to our fair value as of Nov. 2.

The company announced its updated capital investment plan totaling $16 billion to $17 billion from 2024-28, a sizable step up from the company’s previous five-year $14 billion to $15 billion investment program. Management’s ability to continue to identify capital investment opportunities supports our view that American Water has one of the best long-term growth profiles in the sector.

Achieving constructive regulatory outcomes will be important to support the company’s new capital investment program. The company continues to have a busy regulatory schedule. We continue to expect management to achieve favorable outcomes throughout our five-year outlook.

While some of American Water’s peers have had difficulty closing municipal water acquisitions, American Water continues to execute on identifying and closing acquisitions. The company expects 2% annual customer additions, consistent with previous expectations. The company has over $611 million of acquisitions under agreement. The pipeline for future acquisitions remains very healthy with 1.3 million potential customer connections.