Barron's: Reasons for Optimism at American Water Works

Despite American Water Works' (AWK) poor perfomance to date, Barron's Jack Willoughby sees reason for optimism. American Water Works, North America's largest public water and waste-water service provider, trades at $20 - below the already-discounted $21.50 of its April 22 offering. But political and financial sentiment is starting to shift in its direction, and strict regulatory requirements that have held back revenue growth are loosening.

In 2003, German Utility Giant RWE (RWEOY.PK) paid $8B for the company. As part of that deal, RWE was required to agree to a five-year rate freeze in many states, limiting the company's ability to raise revenue. Those five years are now up, and American Water can finally focus on growing its rate base again.

Rising concerns about the transportation and environmental costs of bottled water have created a growing movement of people who just want good, clean tap water. Public utility commissions are encouraging water companies to upgrade the infrastructure and delivery mechanisms which companies like American Water Works provide. The investment to upgrade will come in the form of higher rates to consumers, which means higher revenues for American Water Works.

"We're in the business of investing in infrastructure with a long-term horizon," CEO Don Correll says. "We don't worry much about what happens in just three months."

Analyst Ryan M. Connors thinks shares are worth $26 - 30% above recent levels.

Comments

[Norman Lepo...:]

AWK has been a poor performer. I do not agree with the author.

2008 Aug 11 09:12 AM

[Pfloyd234:]

I don't agree either. I just got done reading their Prospectus. They are regulated quite a bit and that limits their ability to raise their rates but that is not the biggest worry of mine. It sounds like those are easing a bit. Their Debt is very worrisome. They got 3-4 million in cash on their balance sheet compared to over 5 billion in debt.

2008 Aug 15 08:29 PM