American Water Works: Solid Utility, But A Bit Pricey At Current Levels

Summary

• American Water Works is a well-run water utility.
• Its operating margin has increased over the last five years while the debt/asset ratio is contained.
• It's a bit pricey for a 2.1% yield.

American Water Works (NYSE:AWK) is the largest water utility by market capitalization, which is currently $14 billion. The next largest competitor is half its size. Out of 14 industry members, AWK has the 6th highest PE (25.86), the 7th highest forward PE (22.42), and the 9th highest dividend (currently yielding 2.10%).

Like other utilities, water utilities have been decreasing for the last few months as interest rates have increased:

AWK's chart shows it is in a downtrend as well:

Prices are now below the 200-day EMA as well as the shorter EMAs (the 10-, 20-, and 50-day). Momentum is negative but rising. According to the wider Bollinger Bands, overall volatility is higher.

While the company operates in 16 states, 6 are responsible for 87% of its revenue and 85% of its customers:

Consumers make up slightly over 50% of the customer base:

Let's turn to the numbers, starting with the relevant data from the income statement (data from Morningstar.com; author's calculations):

Unlike utilities from the energy sector, AWK's revenue has increased modestly for the last four years. Next up, notice that it doesn't have a gross margin, which is due to its raw material mostly coming from public sources:

Purchased water is folded into operating expenses. While the operating margin has improved, the net margin has bounced around a bit due to interest and financing related issues. The company generates plenty of EBIT, which has also been growing as a percentage of gross revenue. The debt/asset ratio has decreased marginally. Income investors should be pleased with the company's conservative payout ratio.

An item from the cash flow should be highlighted:

The company has projected a capital spending increase of $7.2 billion over the next five years, meaning it'll have to make fairly large rate requests going forward.

The stock is only yielding 2.1%. With the 10-year Treasury yielding near 3%, a 24 PE is just too pricey. The only way the trade makes sense is if sufficient capital appreciation is possible. I'd like to see prices move above the shorter EMAs (10, 20, and 50) before revisiting the possibility.

This post is not an offer to buy or sell this security. It is also not specific investment advice for a recommendation for any specific person. Please see our disclaimer for additional information.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.