Why American Water Works May Not Want A Fed Pivot

Why American Water Works May Not Want A Fed Pivot
3844328 / Pixabay
  • American Water Works delivered a strong earnings report and affirmed its full-year EPS guidance. 
  • Revenue is slightly down year-over-year, but earnings continue to grow. 
  • AWK stock is still down 22% for the year, possibly on valuation concerns. 
  • If the Federal Reserve continues its current path, AWK stock is likely to remain under pressure. 

American Water Works Company (NYSE:AWK) stock is up 0.65% after beating the top and bottom lines in its third-quarter earnings report that it delivered on November 1, 2022. The water utility company delivered top-line revenue of $1.08 billion which beat expectations for $1.07 billion.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2022 hedge fund letters, conferences and more

 

Top Holdings Of Lee Ainslie Not Appearing In 13F Filings [ Exclusive]

Screenshot 2022 10 31 18.08.05Lee Ainslie’s Maverick Fund enjoyed a very strong third quarter, both in absolute and relative performance terms, according to a copy of its third-quarter investor update, which ValueWalk has been able to review. A strong recovery During the first half of 2022, the fund registered huge losses. After reporting double-digit gains in the past three Read More


Find A Qualified Financial Advisor

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.

If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.


And on the bottom line, the beat was even stronger. The company posted $1.63 earnings per share (EPS), which was 7% above the forecast for $1.51 EPS.  

With news like that, and because it’s a utility stock, it would be reasonable to think that AWK stock would be up for the year. But it’s not.

In fact, the stock is down about 22% for the year. And one reason may be that investors consider the stock to be overvalued. And that’s why investors may want to wait for the Federal Reserve’s decision before buying or selling AWK stock. 

A Steady Source Of Revenue And Earnings 

American Water Works and its subsidiary companies supply water and wastewater services to approximately 3.4 million business and residential customers. These customers are spread throughout 1,700 communities in 14 states in the United States including California.  

This allows the company to deliver a consistent stream of revenue. After all, water usage tends to remain constant. On a year-over-year basis, revenue is down by about 3%. It’s also important to point out that this quarter broke a string of seven quarters in which the company’s revenue came in lower than expectations.  

However, earnings are up. And the company affirmed its full-year earnings guidance. American Water Works is forecasting earnings per share of $4.39 to $4.49. The lower end of that range would be a year-over-year increase of about 3%. Plus, the company is guiding for high single-digit earnings growth in 2023 with a range of $4.72 to $4.82. 

The company does plan to spend between $30 and $34 billion on capex through 2031. That’s about 120% of its current market capitalization and the company plans to continue acquiring smaller utilities as part of its growth plan.  

A Risk-On Asset In The Utility Sector 

Let’s be clear. American Water Works is not a risk-on stock. However, the company has increased its adjusted earnings per share at an average annual rate of 8.6% over the last decade. That puts it at the high end of the utility sector.  

And not long ago, AWK had a price-to-earnings (P/E) ratio of over 34x. That put it right around the sector average of 36x. At a time when many investors value safety more than anything else, metrics like a P/E ratio (which isn’t always the best indicator) can take on outsized significance. However, MarketBeat shows the stock with a much more favorable P/E ratio of around 20x. 

But investors are still cautious of any stock that looks overvalued. This is where the Fed may come in. If the Federal Reserve shows any sign that it may be slowing the pace of interest rates, it’s likely to change investors’ appetite for risk. And that could be favorable for AWK stock.  

On the other hand, if the Fed continues to be hawkish, the price chart for American Water Works would suggest that investors may want to see a clear sign that the company will hit its earnings target before jumping in on a stock that is up 60% in the last five years.  

Should you invest $1,000 in American Water Works right now?

Before you consider American Water Works, you’ll want to hear this.

MarketBeat keeps track of Wall Street’s top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… and American Water Works wasn’t on the list.

While American Water Works currently has a “Hold” rating among analysts, top-rated analysts believe these five stocks are better buys.

Article by Chris Markoch, MarketBeat

Source link

Share Now

Dheeru Rajpoot

I am Dheeru Rajpoot an Entrepreneur and a Professional Blogger from the city of love and passion Kanpur Utter Pradesh the Heart of India. By Profession I'm a Blogger, Student, Computer Expert, SEO Optimizer. Google Adsense I have deep knowledge and am interested in following Services. CEO - The Rajpoot Express ( Dheeru Rajpoot )

Leave a Reply