BofA Securities Resumes Coverage on American Water Works Company, Inc. (NYSE:AWK) with Underperform Rating - Analysis, Projections, and Insights
In a recent announcement, BofA Securities has reinstated its coverage on American Water Works Company, Inc. (NYSE:AWK) and assigned an underperform rating to the stock, setting a price target of $140.00. The decision comes after a period where American Water Works outperformed regulated electric and gas utilities due to low interest rates, leading to a high valuation compared to its peers.
BofA Securities highlighted that American Water Works had reached a relative premium of approximately 90% over regulated gas and electric utilities, but this trend reversed in 2022 as interest rates rose. The company's historical earnings per share (EPS) growth rates started aligning more closely with its counterparts. Despite these changes, American Water Works still maintains a 45% relative price-to-earnings (P/E) premium over electric and gas utility companies, a premium that BofA Securities believes is higher than justified.
The firm prefers water utility companies with more reasonable valuations, such as Essential Utilities Inc. (NYSE:WTRG). They projected EPS figures for American Water Works for the years 2024, 2025, and 2026, estimating values of $5.28, $5.70, and $6.12 respectively. This forward-looking guidance is part of their rationale for the underperform rating and price target.
American Water Works recently settled a New Jersey rate case resulting in a $79.5 million annual revenue increase. The company's financial performance in the second quarter and first half of 2024 has been solid, with a raised EPS guidance for the year. Despite potential legal challenges, the company's long-term targets remain intact.
InvestingPro Insights provide a comprehensive view of American Water Works' financial health, with a market capitalization of $29.05 billion and a P/E ratio of 30.51. The company's revenue growth of 7.68% over the last twelve months may justify its premium valuation. Tips from InvestingPro suggest a strong dividend track record and positive analyst sentiment.
While American Water Works has seen a significant stock price increase, value-oriented investors may be cautious due to its high earnings multiple. As investors evaluate the company's potential, metrics and tips from InvestingPro offer valuable context for decision-making.
In conclusion, despite BofA Securities' underperform rating, American Water Works remains a strong player in the utility sector with positive financial indicators and growth prospects. Investors should consider the company's historical performance, valuation, and market trends before making investment decisions.