CPUC Approvals Enable Major Investments And New Contracts Through 2027

Key Takeaways

• Regulatory approvals for infrastructure investments and new military base operations could significantly boost revenue and enhance service reliability.
  
• Strong operational execution and securing capital awards are likely to sustain earnings growth, increase investor confidence, and drive shareholder value through dividends.
  
• Increasing expenses, regulatory setbacks, and revenue volatility are pressuring American States Water's margins and overall financial stability.

Catalysts

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

• The recent constructive regulatory outcomes from the California Public Utilities Commission will allow substantial infrastructure investments, with authorized investment of $573.1 million in capital infrastructure for water utilities, which should positively impact revenue through capital recovery and enhance service reliability.
  
• ASUS, American States Water's contracted services business, secured $56.5 million in new capital upgrade awards with projects scheduled through 2027, providing a pipeline for future revenue growth and potentially improving net margins through economies of scale.
  
• Initiation of operations at two new military bases on the East Coast could expand revenue streams and bolster earnings as these contracts start to contribute more significantly to financial performance.
  
• Expected dividend growth, following a robust historical trend, could enhance shareholder value and potentially drive stock demand, positively affecting the company's overall earnings per share (EPS).
  
• The ability to continue securing significant capital awards despite a challenging environment is indicative of strong operational execution which could drive future revenue and maintain robust earnings growth, boosting investor confidence and enhancing perceived stock value.

American States Water Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American States Water's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.0% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $146.5 million (and earnings per share of $3.73) by about March 2028, up from $118.8 million 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 26.6x on those 2028 earnings, up from 24.7x 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 2.49% 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 States Water Future Earnings Per Share Growth

Risks

• Higher operating expenses and interest costs are diluting earnings, reducing net margins and potentially affecting profitability.
  
• The issuance of equity under the at-the-market offering program has a dilutive effect on earnings per share, impacting the company's ability to increase earnings.
  
• The rejection of a full sales and revenue decoupling mechanism and certain regulatory mechanisms by the CPUC could impact revenue predictability for Golden State Water, introducing revenue volatility.
  
• Retroactive rate increases may obscure future revenue expectations and cash flows, particularly if such retroactive adjustments do not continue, potentially impacting future revenue consistency and predictability.
  
• Fluctuations in labor costs, maintenance expenses, and the costs associated with wildfire mitigation plans for the electric utility segment may pressure net margins and overall financial health.

Valuation

• The analysts have a consensus price target of $79.333 for American States Water 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 $91.0, and the most bearish reporting a price target of just $71.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $691.0 million, earnings will come to $146.5 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 6.2%.
• Given the current share price of $77.09, the analyst price target of $79.33 is 2.8% 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.