Company Overview: American Water Works Company, Inc. (NYSE: AWK) is involved in the water and wastewater utility business. The company segments involve regulated companies, which holds the ownership of water utilities for residential, industrial, commercial, public, and fire services. The Military Services Group secures long-term agreements with the state government.
AWK Details
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Material Business Updates
Figure 1: Recent Business Updates
Source: Company Reports, Analysis by Kalkine Group
Historical Financial Trend:
AWK illustrated sustainable historical growth by consistent revenue growth and stable margins. The Operating revenues have been growing since FY16 with constant net income increase. Operating revenues grew at a 3.4% CAGR (FY16 – FY20).
Figure 2: Historical Financial Overview
Source: Company Reports, Analysis by Kalkine Group
First Quarter FY21 Performance:
Figure 3: Spotlight Performance of Q3FY21
Source: Company Reports, Analysis by Kalkine Group
Full-Year FY20 Performance:
Figure 4: Annual Performance Highlights
Source: Company Reports, Analysis by Kalkine Group
Top 10 Shareholders:
The top 10 shareholders together form ~36.87% of the total shareholding. The Vanguard Group, Inc. and State Street Global Advisors (US) hold a maximum stake in the company at ~11.86% and ~5.37%, respectively.
Figure 5: Top 10 Shareholders
Source: Analysis by Kalkine Group
Key Metrics:
A prudent infrastructure investment roadmap, synergies from acquisition strategies, and consistent organic growth resulted in consistent revenue growth over the past five years. The current ratio improved, owing to prudent working capital management.
Figure 6: Key Financial Metrics
Source: Analysis by Kalkine Group
Outlook:
Figure 7: Business Plan for Coming Years
Source: Company Reports, Analysis by Kalkine group
Key Risks:
The water utility business is susceptible to the water rates, typically regulated by the state government contracts. The low bargaining power in water rates may cause revenue to fluctuate. The high operational requirements and maintenance costs are expected to counter any breakdowns.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Stock Recommendation:
AWK has delivered 3-month and 6-month returns of ~-14.039% and ~-19.086%, respectively. The stock is trading below the average of the 52-week low price of US$131.01 and the 52-week high price of US$189.65, indicating an accumulation opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). Considering the robust water demand and favourable rates, the company might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple). For valuation, a few peers like California Water Service Group (NYSE: CWT), SJW Group (NYSE: SJW), Global Water Resources Inc (NASDAQ: GWRS) and others have been considered. Considering the resilient demand, prudent capital planning, sufficient financing availability, current trading levels, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the closing market price of $146.77, as of 15 February 2022, down by ~0.85%.
AWK Weekly Technical Chart (Source: REFINITIV)
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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