ASUS's New Projects Will Improve Service Reliability And Future Prospects

Key Takeaways

• New rate settlements and infrastructure investments are poised to enhance service reliability and significantly boost revenue for American States Water.
  
• ASUS' capital upgrades and new project awards indicate strong future earnings growth and an improved revenue outlook.
  
• Higher operating expenses, regulatory uncertainties, and increased capital expenditures could pressure earnings and revenue stability, exacerbated by potential equity dilution impacts on EPS.

Catalysts

Through its subsidiaries, provides water and electric services to residential, commercial, industrial, and other customers in the United States.

• Approval of the settlement agreements for new water and electric rates, if granted, would authorize significant investments in infrastructure, leading to increased revenue through enhanced service reliability and growth in rate base over the next few years. This will likely impact revenue and earnings positively.
  
• Golden State Water's settlement agreement includes projected operating revenue increases of approximately $23 million for 2025, with potential additional increases of $20 million in 2026 and 2027 due to authorized investments and inflation adjustments, excluding revenue from specific capital projects. This would bolster revenue over the next few years.
  
• Record-high capital upgrade construction project awards for ASUS, specifically $54 million in new projects expected through 2027, indicate strong future earnings growth from these newly awarded projects, enhancing the overall revenue of ASUS.
  
• Expected increases in ASUS' annual earnings contribution for 2025, driven by the recent addition of new bases and advancements in capital upgrade work, suggest an improved revenue outlook from this segment of the business.
  
• Retroactive electric rate increases, once approved, are expected to result in a cumulative positive impact on earnings per share from 2023 and 2024 due to backdated revenue adjustments, leading to increased cumulative earnings when recorded.

American States Water Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American States Water's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.2% today to 21.1% in 3 years time.
• Analysts expect earnings to reach $145.0 million (and earnings per share of $3.69) by about December 2027, up from $110.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.7x on those 2027 earnings, down from 28.1x today. This future PE is greater than the current PE for the US Water Utilities industry at 23.8x.
• Analysts expect the number of shares outstanding to grow by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

American States Water Future Earnings Per Share Growth

Risks

• The company faces higher operating expenses and interest costs, which could negatively impact net margins.
  
• Delays in receiving decisions in electric general rate cases may affect revenue stability and earnings.
  
• Unresolved regulatory issues and pending approvals for rate changes could create uncertainty around future revenue projections.
  
• Increased capital expenditures for infrastructure may generate long-term benefits, but they could pressure near-term earnings if funded through increased debt.
  
• The dilutive effects from ongoing equity issuance under the at-the-market offering program could reduce earnings per share.

Valuation

• The analysts have a consensus price target of $86.67 for American States Water based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $687.8 million, earnings will come to $145.0 million, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 5.9%.
• Given the current share price of $82.41, the analyst's price target of $86.67 is 4.9% higher. 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.