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American Water Works: Fundamentals Are Unattractive, Cash Out Gains

Fade The Market profile picture
Fade The Market


  • Being in the utility industry, AWK was not an exception from the challenging 2022 FY.
  • AWK faces sequential dilutions until 2027, which I believe will affect the company's share prices.
  • In light of the unattractive fundamentals, it is preferable to cash out gains and hold off on reinvesting until conditions are more favorable.

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Investment Thesis

Through its subsidiaries, American Water Works Company, Inc. (NYSE:AWK) provides water and waste water services in the United States. Being in the utility industry, AWK was not an exception from the challenging 2022 FY. The utility industry was generally

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Fade The Market profile picture
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Comments (5)

High Sharpe profile picture
My metric for overvalued with these guys is this: 10 years ago they generated ttm cash flow ops of 957 million. Now they generate around 1.4 billion. 10 years ago their enterprise value was 13 billion, now its 40+billion. So cash flow ops went up 47% and enterprise value went up 200%, assets basically doubled, but operating cash flow to ev is around 2.7% today vs. 6.9% in 2013, seems a bit stretched. My vote with author
The share count has been going up forever, including over the past 10 years when it had a total return of 330.4% vs. 203.1% for the S&P 500.

When authors talk about growth stalling, they usually refer to things like revenues, earnings, cash flows... Saying growth has stalled because the stock fell 11% seems silly. AWK has greatly outperformed the S&P 500 over the past five and ten years, is tied on a 1 year (total return) basis. It has underperformed over the prior 3 years as the stock was probably ahead of itself and its valuation has been slowly correcting during that period. For dividend growth steady eddies like this with relatively low current yields of ~2-3%, their performance in 2022 wasn't great as their valuations, but not necessarily their operating fundamentals, were hurt by rising interest rates.

When I see you question the growth of this excellent performer over the past 5-10 years, my question for you is what exactly in the fundamental story for American Water Works has changed?
@Big Mountain Jim The company ops don't need to move for the valuation to fall. The yield on this is already -3% in real terms and below treasuries - so there is significant growth priced in. If the market starts believing the fed on the long end of the curve, look out below on names like this.
moseharper profile picture
Ah, yet more comparisons to standard corporate measures for AWK here. They do not work- it is a unique utility that can and does function nationwide. For example, with constant cash flow from monthly receipts from customers, it does not need to maintain huge cash balances. CR and QR ratios do not apply to AWK.
And the same old question- does it pay it's dividend from cash flow or does it borrow it? This has been hashed out several times in the past. Glad to see it is up a respectable amount today.
Points well taken, but Utility 101 is that Utilities employ a high degree of debt in their capital structure because of the predictable nature of their cash flows and their high fixed asset base (i.e. people need water). The key then becomes if they are managing their debt structure appropriately. If they have a competent CFO we should find most of their debt is termed out in a laddered fashion (debt management 101). Also, in this environment doing a proactive equity raise should be applauded if you have the intermediate and longer term in mind. It also makes sense in their case since they are serial acquirers and can use the cash from the raise to make accretive acquisitions which would be a positive for shareholders.
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