Investments In Water Quality And Resilience Will Increase Customer Connections Over Time

Key Takeaways

• Strong execution on infrastructure investments and favorable regulatory outcomes support revenue growth via expanded customer base and service reliability.
  
• Strategic capital investments and disciplined financing plan signal robust EPS and shareholder returns through enhanced earnings and customer growth.
  
• Leadership transition, capital costs, and regulatory challenges may create revenue stability risks despite growth efforts through acquisitions and water conservation efforts.

Catalysts

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

• American Water Works Company's strong track record of consistent execution on infrastructure investments and regulatory approvals could drive future revenue growth through expanded customer base and improved service reliability. This will likely impact revenue positively as they recover costs through rate increases.
  
• The company’s commitment to 7%-9% EPS growth through strategic capital investments in infrastructure and acquisitions indicates an operational focus on expanding rate base and customer base, which is expected to enhance earnings and provide higher shareholder returns.
  
• Regulatory diversity and active rate case management across multiple states, such as in Illinois and California, highlight the company's ability to secure favorable rate outcomes, supporting robust revenue streams and margin stability, ultimately benefiting net margins.
  
• A well-structured 5-year financing plan with limited equity issuances in the near term suggests a disciplined capital approach to support growth without immediate dilution, which should benefit long-term earnings per share growth.
  
• The strategic investments in water quality and resilience projects, as well as a focus on acquisitions, signal a forward-looking growth strategy that may lead to increased customer connections and revenue expansion over time.

American Water Works Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Water Works Company's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.4% today to 23.4% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $6.5) by about March 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 24.5x on those 2028 earnings, down from 26.8x today. This future PE is greater than the current PE for the US Water Utilities industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

American Water Works Company Future Earnings Per Share Growth

Risks

• The transition in leadership with the upcoming retirement of CEO Susan Hardwick could create uncertainties or challenges in strategic continuity, potentially affecting earnings stability and growth.
  
• The capital investment program, while crucial, involves substantial costs that may lead to increased debt or require external equity issuance, potentially impacting net margins and shareholder returns.
  
• Regulatory outcomes, such as the partial decoupling mechanism in California, may not fully support favorable revenue adjustments, which could pressure future revenue growth.
  
• The ongoing pressure from customer water conservation efforts and declining water usage per customer may continue to limit revenue growth.
  
• The acquisition strategy, although a growth driver, involves risks of integration and potential delays that might cause variability in customer base expansion, impacting future revenue stability.

Valuation

• The analysts have a consensus price target of $137.442 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 $159.0, and the most bearish reporting a price target of just $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.6 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $144.75, the analyst price target of $137.44 is 5.3% 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.