American Water Works Delivers Amid Challenging Macro Environment

We are reaffirming our $132 fair value estimate for American Water Works AWK after the company reported full-year operating earnings per share of $4.51, up from $4.25 in 2021 and above management’s 2022 EPS guidance of $4.39-$4.49.

The company reaffirmed its 2023 EPS guidance of $4.72-$4.82, in line with our expectations. It also reaffirmed its long-term 7%-9% earnings growth and dividend growth outlook, which we expect it to achieve at the midpoint.

During 2022, the company closed $335 million in acquisitions, slightly below our full-year expectation. However, it has $326 million in acquisitions under agreement, including a $232 million agreement to acquire the Butler Area Sewer Authority in October, giving us confidence that the pipeline for municipal acquisitions remains strong. Management noted 1.3 million customer connections in the pipeline. With favorable fair market legislation across the majority of American Water’s territory, we expect the company to acquire $400 million-$500 million in municipal acquisitions annually.

The company’s $14 billion-$15 billion capital investment plan through 2027 supports our growth outlook. To fund the plan, the company will issue $2 billion of equity with the majority coming in the current year. We like management’s use of equity to fund the capital investment plan, given the stock’s current valuation. The stock trades at a 12% premium to our fair value estimate.

Earnings in 2022 benefited from rate increases and favorable weather, partially offset by higher costs. For 2023, earnings will be supported by continued infrastructure investments and municipal acquisitions. Constructive rate case outcomes achieved in 2022 will help mitigate roughly 75% of inflationary cost pressures and increased pension costs. However, inflationary pressures and higher interest rates will require management to continue to manage costs.