Legislative Changes And Capital Investments Will Secure Future Infrastructure

Key Takeaways

• Strategic investments and favorable regulatory changes support American Water Works Company's revenue growth, earnings stability, and potential for improved net margins.
  
• Ongoing acquisitions and consistent dividend growth strategies enhance shareholder returns and contribute to expanding the company's revenue base.
  
• Regulatory and economic pressures, along with rising costs and infrastructure investment needs, could constrain American Water Works' financial performance and growth prospects.

Catalysts

Through its subsidiaries, provides water and wastewater services in the United States.

• American Water Works Company's capital investment program aims to invest approximately $3.3 billion in 2025 to grow regulated rate base at a long-term rate of 8% to 9%, impacting future revenue and earnings growth.
  
• The company experienced successful rate case settlements, such as those in Missouri and Virginia, which will lead to increased allowed revenue and improve return on equity, positively impacting future net margins.
  
• Recent legislative changes in states like Missouri, Indiana, and Virginia facilitate infrastructure investments and improve regulatory recovery mechanisms, potentially enhancing earnings stability and growth.
  
• The company expects to maintain its dividend growth of 7% to 9% per year, supporting overall shareholder return and potentially boosting earnings per share.
  
• Acquisition opportunities continue to expand across various states, including Pennsylvania, West Virginia, and New Jersey, which should drive revenue growth as newly acquired facilities integrate and begin to generate returns.

American Water Works Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Water Works Company's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.2% today to 23.2% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $6.63) by about May 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.9x on those 2028 earnings, down from 27.2x today. This future PE is greater than the current PE for the US Water Utilities industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.32%, as per the Simply Wall St company report.

American Water Works Company Future Earnings Per Share Growth

Risks

• Regulatory risks in states like Missouri and Virginia could lead to lower-than-expected revenue increases, as settlements have resulted in lower rate hikes than originally requested. This could impact future cash flows and net margins.
  
• Rising operating costs, specifically in operations and maintenance due to employee-related costs and recent acquisitions, could constrain net margins despite increased revenues.
  
• Potential tariff impacts on raw materials and construction-related expenses can exert upward pressure on capital and operating costs, adversely affecting net margins if not effectively controlled.
  
• The need for significant continued capital investment in aging infrastructure and compliance with environmental regulations (such as PFAS and lead service line replacements) could strain cash flows and impact earnings if regulatory support for cost recovery is insufficient.
  
• Economic recession risks might pressure municipal finances, potentially affecting acquisition opportunities and the ability to consistently grow the rate base as planned, thereby impacting revenue growth targets.

Valuation

• The analysts have a consensus price target of $142.702 for American Water Works Company based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $122.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 24.9x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $149.2, the analyst price target of $142.7 is 4.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.