About American Water Works
Whether it is drinking water specifically or the water with which we use to clean ourselves or the water used within the spectrum of our toilets, the undeniable fact of the matter is that if we did not have water on this earth, things would be a lot worse and, tragically, there are still many communities and regions that do not have access to clean water, nor perhaps any water at all.
Still, water is a business, at least in the United States, and Camden, New Jersey-headquartered American Water Works is the private sector, public company (NYSE: AWK) leader when it comes to water.
If you happen to recall one of our somewhat recent articles on a large worldwide utilities player, American Water Works makes money in essentially the exact same way but just through a different resource, so while a certainly separate resource than natural gas, American deals in water, generating revenue primarily through usage of said resource.
In other words, when you pay your water bill for your home or when the local restaurant business you own turns the faucet on in the back of house, American Water Works might just be racking it in.
In addition to charging individuals and businesses for their water usage, the company also maintains services within the water treatment segment, hosting a few different nationwide facilities that are intent on treating water before you drink it, ensuring that it is safe to consume, in addition to delivering water to homes and businesses.
No doubt, this regulated utility company serves a very critical role in society and within the communities it specifically serves.
So, to a certain extent, American Water Works can be considered an infrastructure play, and with that, as concerns regarding clean water continue rising around the United States and the world overall, we suspect this company has a lot of friends within local and national government and can likely leverage these relationships through the passing of favorable, infrastructure-friendly bills and legislature, also perhaps allowing the ever so willing taxpayer to chip in and help finance new revenue generating projects for American Water Works.
Please detect our sarcasm on that last part.
But this is just how it goes, and objectively speaking, this type of closeness to government officials mixed with just how valuable, precious, and limited a resource such as water is bodes well for the company in question, and, of course, this might actually be the most recession proof business model we have yet seen in any of our analyzed companies and their associated stocks, being that largely irrespective of socioeconomic status (within the United States, specifically), folks pay for water because they absolutely need water, which also bodes well for this company and is a major point of attraction, especially within a particularly volatile economic period.
At any rate, let’s make like American Water Works and keep on flowing into this company’s core financials and other relevant metrics so as to determine whether or not this specialized, regulated utility is worth pondering as a long-term investment holding in thou’s just as precious investment portfolio.
American Water’s stock financials
According to TD Ameritrade’s platform (specifically their description in their “Company Profile” of this company), American Water Works serves “approximately 14 states,” also including that its “utility operates in the states, such as Georgia, Hawaii, Indiana, Iowa, Kentucky, Maryland, Tennessee, Virginia and West Virginia,” operating within “1,600 communities,” within these states and regions within.
That is a lot of water.
With all of that water and the treatment and transportation thereof, American’s present prevailing market capitalization amounts to $25.97 billion with a corresponding share price of $133.38 along with a listed price-to-earnings (P/E) ratio of 27.68, also paying an annual dividend out to its shareholders of $2.83.
With this preliminary information, shares of American Water’s stock (NYSE: AWK) appear to be a bit full of themselves at the moment, with its price-to-earnings ratio notably higher than that of the standard, fair value benchmark of 20, and we don’t presume (but we will verify, of course) there is a lot of growth leaking (sorry, we sort of had to) from this company, as with great amounts of operational stability there usually lies limited growth, especially as it relates to (highly) regulated utilities, therefore, for the time being we feel comfortable in saying that the company’s stock is overvalued.
Of course, we would love to be proven wrong later in this regard.
Before proceeding, it’s worth noting the company’s dividend, as we presume this utility has little to no issues with cash flow (no pun intended, really), thus we assume it can sustain such a dividend in the long run, but, again, assumptions be darned, let’s keep investigating.
American Water Works’ executives are in charge of taking care of and tending to approximately $27.7 billion in terms of total assets along with around $20 billion in terms of total liabilities, which is frankly pretty much exactly what we had initially expected, as given all of the facilities and equipment these lines of business and associated scale commands, it is no wonder that this company has the level of total liabilities it does, however, even though this is the case, American still has more total assets under its corporate umbrella, and by a more than allaying margin at that, which is simply great to see from such a resource, equipment and naturally debt-heavy business operator.
Regarding the company’s income statement, American Water Works’ total annual revenues (measured beginning in 2018) have floated within the $3 billion area code between 2018 and 2022, which speaks highly to the company’s lack of growth yet its continued, recession proof business model, again, tending to be one of largest perks of being a utility. Sure, some years were higher than others and Americans were seemingly consuming more water during certain years (or perhaps American Water Works upped its prices for a certain period(s) of time), however, American Water Works, from a recent year-over-year (YOY) revenue generation standpoint has been just about as steady as they come.
With respect to the company’s cash flow statement, American Water Works’ net income and total cash from operations (again, referencing from 2018 to 2022) have been both positive and consistent which was to also be expected, with, for example, the company’s total cash from operations ranging between $1.1 billion (2022) and $1.4 billion, as reported in 2021.
American Water’s stock fundamentals
Evidently, according to the figures above, American doesn’t have the most difficult of feats when it comes to producing cash.
Let’s dig into this a little more, specifically regarding the company’s trailing twelve month (TTM) net profit margin as it is shown on TD Ameritrade’s platform.
For instance, the company’s TTM net profit margin is pegged at 22.26% to the industry’s respective average of 12.98%, obviously favoring American Water Works, perhaps as a result of its sheer market share but we think it can be mostly attributed to its seemingly distinct market operating selection, or in layman’s terms, its ability and track record of selecting quite profitable regions in the United States to operate in, which, if this is the case, American Water Works has certainly made the right choices in this arena.
Lastly, regarding the company’s TTM returns on both assets and investment(s), American’s are both competitive yet still slightly have the upper hand on the basis of its competition, with its TTM return on assets at 3.23% to the industry’s listed average of 3.14%, along with the company’s TTM return on investment of 3.47% to the industry’s slightly trailing 3.41%, indicating that this is a very, very competitive space in these respects, yet the behemoth of the space still maintains the advantage.
Should you buy American Water Works stock?
Given these numbers alone and some of the previously mentioned characteristics of the landscape and regulatory environment within which it operates, American Water Works is a great utility.
Still, we would be breaking our own rules and instantly losing credibility if we said that all of this justified paying a rather sizable premium for an ownership stake in the company through its stock (NYSE: AWK), particularly referencing its outsized price-to-earnings ratio compared with its revenues that just aren’t really growing on a year-over-year basis.
With the state of its solid (but not growing) total annual revenues, I can’t over pay for no growth, as I would be instantly limiting my upside, basically putting dead money into the market.
However, with the excellent condition of its balance sheet, its steady and stable revenues, its flowing stream of cash (pun certainly intended, sorry, not sorry) and more than respectworthy TTM net profit margin and returns on assets and investment(s), we are certainly waiting for this company’s stock to fall down a few notches so as to at least have the opportunity to jump on the American Water Works train at a much reasonable and fair price.
For now, on the basis of valuation alone, this company deserves a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.