American Water Works Company Inc (NYSE:AWK) is considered a high growth stock. However its last closing price of $82.13 left investors wondering whether this growth has already been factored into the share price. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors. See our latest analysis for American Water Works Company
Where’s the growth?Analysts are predicting good growth prospects for American Water Works Company over the next couple of years. Expectations from 11 analysts are certainly positive with earnings forecasted to rise significantly from today’s level of $2.393 to $3.814 over the next three years. This indicates an estimated earnings growth rate of 10.42% per year, on average, which indicates a solid future in the near term.
Is AWK’s share price justified by its earnings growth?
As Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price.” American Water Works Company is available at price-to-earnings ratio of 34.32x, showing us it is overvalued compared to the US market average ratio of 18.13x , and overvalued based on current earnings compared to the water utilities industry average of 14.85x .
We already know that AWK appears to be overvalued when compared to its industry average. But, to properly examine the value of a high-growth stock such as American Water Works Company, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 34.32x and expected year-on-year earnings growth of 10.42% give American Water Works Company a quite high PEG ratio of 3.29x. So, when we include the growth factor in our analysis, American Water Works Company appears overvalued , based on fundamental analysis.
What this means for you:
AWK’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Is AWK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has AWK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AWK’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.