American Water Long
American Water is the largest and most geographically diverse U.S. publicly traded water and wastewater utility company. The main reason why I chose this company goes back to the same reasons I decided to choose CSX. They don’t operate the same way usual companies do, meaning most of the time they never lose customers, have a good forecast, and provide steady returns. When imagining all of the companies struggling right now and losing customers due to price increases, a water company would probably be the last thing that came to your mind. When have you ever thought of decreasing your water use or not getting water to save money? Some people might argue with me due to the fact that the company will still face issues regarding operational profit margins which again I will disagree with. I assume the main expense when it comes to their operations is the equipment that use to get the water and filter it. They don’t provide watered bottles so the cost of plastic and bottling won’t be something they will have to deal with. Now if this company was just about to start and buy their equipment from scratch, then yes the new pricings will definitely have a toll on them but they have already had this equipment so the new pricings won’t affect them. Obviously, there are still going to be service costs on these types of equipment but if a simple 9% inflation on their maintenance is going to affect their profit margins in such a bad way that would make their stock go down, they wouldn’t have been as big as they are now through these business strategies. Another thing food supply companies are dealing with right now is the rise in fuel and transportation costs. But again, American Water doesn’t have to worry about this as their water is delivered through their 53000 thousand miles of pipes. According to last year’s results, they were serving around 3 million contracts with 1.5 million customers. As also stated in their last quarter’s report, they added 59,200 customer connections year-to-date through closed acquisitions and organic growth. This is another sector where they are saving money on while other companies are spending heavy amounts of money on advertisements. I also don’t see any of these customers leaving this company is it is basic necessity in everyone’s lives. At the same time if for any reason they decide to leave this company, they’ll still have to switch to another company which considering all of the work and hassle it takes, wouldn’t be worth it. I could be wrong about this company doing well this quarter as their expected revenue is still going to be lower than what they reported last year meaning that they are still being affected by the environment. The expectations from this quarter have also been significantly increased compared to last quarter, making it much harder for them to beat the expectations.
Investor’s opinions:
American Water Works Company, Inc. has been growing its earnings per share faster than most utilities.
American Water Works has a promising capital plan until 2026.
The utility is resilient to the challenges posed by 40-year high inflation and the increasing risk of an upcoming recession.
American Water Works Company, Inc. is a bright exception, as it has repeatedly proved essentially immune to recessions. In addition, the company has limited exposure to inflation and can easily pass its increased costs to its customers. As a result, it is resilient in the highly inflationary environment prevailing right now.
Thanks to the essential nature of its business, American Water Works has proved essentially immune to recessions in several occasions. Even under the most adverse economic conditions, consumers and companies do not reduce their consumption of water. This proved to be the case in the fierce recession caused by the pandemic in 2020. The company grew its earnings per share by 7% in 2020, to a new all-time high, and by another 10% in 2021. The resilience of the company to recessions is paramount in the current investing environment, as an imminent recession has become almost inevitable due to the efforts of the Fed to restore inflation to its normal range.
The other major challenge for most companies is the 40-year high inflation, which has resulted from the immense fiscal stimulus packages offered in response to the pandemic, as well as the ongoing war in Ukraine, which has greatly reduced the global supply of several commodities. Due to high inflation, many companies are facing steep increases in the costs of raw materials, freight and labor and thus they have incurred a sharp contraction in their operating margins and profits. American Water Works is a bright exception, as the effect of inflation on its cost base is limited while the utility can easily pass its increased costs to its customers.
Moreover, while utilities are well known for their reliable growth of earnings, most of them are characterized by slow growth and hence they are unappealing to most investors. This is not the case for American Water Works. To be sure, the company has grown its adjusted earnings per share at an 8.6% average annual rate over the last decade. This is undoubtedly one of the highest growth rates in the utility sector.
American Water Works is also trying to grow its earnings by acquiring many small companies. Management expects to achieve 5%-7% growth of earnings per share thanks to its investments in its regulated business and 1.5%-2.5% growth thanks to the acquisition of smaller peers.
Thanks to these growth drivers, the utility expects to grow its earnings per share by 7%-9% per year on average until 2026. Analysts seem to agree on this outlook, as they expect the company to grow its bottom line by 8.2% per year on average until 2026.
It is also worth noting that American Water Works has not missed the analysts’ estimates in 8 of the last 10 quarters. It is thus likely to meet or exceed the analysts’ estimates in the upcoming years. Overall, American Water Works has an exceptional performance record and is likely to remain on its reliable growth trajectory for many more years.
American Water Works is well protected from rising interest rates. Its interest expense consumes 32% of its operating income while its net debt stands at $18.3 billion, which is only 73% of the market capitalization of the stock. Given also the reliable cash flows of American Water Works, investors should rest assured that the company has great financial flexibility.
Report time: Today after market close
Estimate: +2.5%
Market cap: 26,448,113,957
P/E ratio: 20.32