Is American Water Works a Bargain After Recent Infrastructure Investment News?

• Wondering if American Water Works Company stock is trading at a fair price, overpriced, or even a bargain? You are in the right place for a deep dive into what drives the current valuation.
• The stock has edged up 0.9% over the past week, but it is down 7.6% in the last month and has slipped 1.0% over the past year, showing some choppy waters despite early-year gains.
• Recent headlines have focused on American Water Works Company's infrastructure investments and regulatory decisions, which help frame the market's mixed response. As the company prioritizes long-term upgrades alongside sustainability commitments, investors are trying to interpret how these moves impact the stock's trajectory.
• When it comes to valuation checks, American Water Works Company scores just 0 out of 6 for being undervalued. That is just the beginning. This article will break down the standard approaches to valuation and, by the end, offer a smarter way to make sense of what the numbers actually mean.

American Water Works Company scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: American Water Works Company Dividend Discount Model (DDM) Analysis

The Dividend Discount Model (DDM) estimates a stock's fair value by projecting all future dividend payments and discounting them back to today's value. This approach is most relevant for companies like American Water Works Company that have a consistent record of paying dividends and a business model centered around shareholder returns.

For American Water Works Company, the latest annual dividend per share stands at $3.77, with shareholders currently receiving just over half of the company’s profits as dividends, indicated by a 56.2% payout ratio. The DDM assumes a sustainable dividend growth rate of 3.26%, which has been reduced from a higher historical figure to reflect a more conservative outlook. That growth is supported by a return on equity of 10.4%, which helps sustain the company's ability to maintain and increase its dividend in the future.

Using these inputs, the DDM produces an intrinsic value estimate of $101.97 per share. However, the current share price is about 30.2% higher than this estimated value, suggesting that the stock may be notably overvalued using this method.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests American Water Works Company may be overvalued by 30.2%. Discover 917 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for American Water Works Company.

Approach 2: American Water Works Company Price vs Earnings

For established, profitable companies like American Water Works Company, the Price-to-Earnings (PE) ratio is a widely used valuation tool. This metric helps investors understand how much they are paying for each dollar of earnings generated by the company. A “normal” or “fair” PE ratio is influenced by factors such as earnings growth expectations, company-specific risks, and the broader industry outlook. Generally, higher growth and lower risk can justify higher PE multiples.

Currently, American Water Works Company trades at a PE ratio of 23.29x. That is notably above both the Water Utilities industry average of 15.79x and its closest peer group, which averages 18.36x. At first glance, this may suggest the stock is trading at a premium versus its sector and peers. However, benchmarks like the Simply Wall St Fair Ratio provide a more tailored comparison. For American Water Works Company, the Fair Ratio stands at 21.90x, capturing important factors such as earnings growth profile, profit margin, industry dynamics, market capitalization, and the company’s risk profile.

Unlike simple peer or industry averages, the Fair Ratio is a proprietary metric that accounts for everything from sustainability of earnings to risk factors and future growth prospects. This makes it a much more relevant comparator when deciding whether a stock’s valuation is justified or not.

Comparing American Water Works Company’s actual PE (23.29x) to its Fair Ratio (21.90x) suggests the valuation is somewhat above what these company-specific fundamentals would imply. While not dramatically out of line, it does indicate a modest premium.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1422 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your American Water Works Company Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. Narratives are a powerful yet easy tool that let you bring together both your perspective on the company and the numbers behind the stock, such as your estimates for fair value, future revenue, earnings, and margins. Instead of just looking at static valuation ratios, a Narrative connects the company’s story with your financial forecasts and uses that information to estimate fair value.

On Simply Wall St’s Community page, Narratives are widely used by millions of investors to document their reasoning and forecasts, helping them decide when to buy or sell by comparing Fair Value to the current price. Whenever important news or earnings are released, Narratives can be updated automatically so your analysis stays current and relevant. This makes following and refining your investment thesis straightforward, even as new information emerges.

For instance, with American Water Works Company, some investors view its aggressive infrastructure investments and regulatory tailwinds as strong reasons for higher earnings and set a bullish price target of $159.00. Others are more cautious, assigning a lower value of $116.00 based on concerns about debt and cost pressures. Narratives allow you to clearly express, track, and update your own view about the stock’s future, bringing clarity to the numbers and empowering you to act confidently.

Do you think there's more to the story for American Water Works Company? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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