American Water Works AWK, through a wide and extensive network, provides water and wastewater services to more than 15 million customers. The company is poised to benefit from systematic capital expenditure and acquisitions to further expand footprint across the United States.
We recently updated a research report on this Zacks Rank #3 (Hold) stock. As the U.S. water infrastructure is getting old, the risk of failure of old pipelines is a persistent worry for the service providers.
Tailwinds
American Water has plans to invest $8.8-$9.4 billion in the 2020-2024 time period and $20-$22 billion in the next decade. A major portion of the planned capital investment will be directed to upgrade and strengthen the aging water and wastewater infrastructure. The company recoups the invested amount through rate revisions approved by the commission. The new rates approved since Jan 1, 2020, will increase American Water’s total revenues by $80 million. In addition to American Water, Essential Utilities WTRG is also making regular investments in water and wastewater systems. Its long-term plan is to invest $2.8 billion in the 2020-2022 time period to rehabilitate and strengthen the existing water and natural gas pipeline systems.
American Water is expanding the customer base through organic initiatives and acquisitions. As of Dec 31, it added 53,100 customers to the existing customer base through 21 acquisitions. Till Jul 31, 2020, the company added 10,800 customers to the existing customer base through completed acquisitions. The 28 pending acquisitions as of Jul 3, 2020 — on completion — are expected to add 43,600 customers to its customer base. Another water utility, Global Water Resources, Inc. GWRS is taking the inorganic route to expand operations in the United States.
Amid the unprecedented economic crisis, American Water has ample liquidity to meet debt obligations. As of Jun 30, 2020, the company had a total liquidity of $2,323 million, which is enough to meet near-term obligations.
Headwinds
American Water envisions improving the quality of buried water pipelines and for that, the utilities need in excess of $1 trillion to fund their systems in the next 25 years. Any disruption in capital markets and change in the company’s credit ratings might make it difficult for American Water to get the necessary or desired amount to fund capital improvements on favorable terms.
The existing water system in the United States is getting older and is prone to fail at some point of time despite the ongoing repairs and overhauls. The network of water and wastewater pipelines, as well as water reservoirs could result in losses and damages that may affect American Water’s financial condition.
Price Performance
Shares of the company have gained 11.4% in the past year against the industry’s 2.6% decline.
Stock to Consider
A better-ranked stock in the same industry is American States Water Company AWR, having a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company’s long-term (three to five years) earnings growth is currently pegged at 4.9%. Its Zacks Consensus Estimate for 2020 earnings has moved 0.9% upward in the past 60 days.
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