Kevin Cole, CFA
American Water Works (AWK) held a constructive earnings call reaffirming its many levers to continue to grow EPS 7-10% annually (weather normalized) and most notably offered clarity on their ability to avoid issuing equity for the “foreseeable future.” AWK continues to look interesting, offering: (a) visible 7-10% EPS growth, (b) dividend growth in line with EPS growth, (c) no block-equity needs to support growth, and (d) compellingly cheap on relative valuation vs. peers, trading at 16.7 times/15.6 times 2013/2014 ... and with AWK carrying a 0.15% dividend yield advantage.
We expect the stock to retain today’s price strength and continue to close the valuation gap with help from the announced “no block equity” profile that should help ease/support the durability of its growth rate.
AWK reported solid 2Q12 results of $0.66, beating both our $0.48 and the Street’s $0.49 with $0.06-$0.09 of favorable weather and $0.10 of lower than expected operation and maintenance (O&M) expenses.
We are updating our 2012-15 EPS estimates to $2.17, $2.17, $2.33, $2.50 and updating our target price to $41 (from $35), consistent with using relative P/E and our annualized rate of return methodology.
Boenning & Scattergood
Aqua America (WTR) reported 2Q 2012 diluted EPS from continuing operations of $0.30 vs. our estimate of $0.27 and consensus estimate of $0.26. The company posted an 11% annual growth rate that consisted of 5% coming from rates increases, 4% from acquisitions/divestitures and 2% from positive weather impact.
WTR’s operations and maintenance (O&M) ratio benefited substantially, due to realignment of assets and recent divestures. The quarterly O&M ratio was roughly 33.8%, which is near levels last seen in the early 2000s. We expect this to return to higher levels in Q3, but continue to trend down on trailing-12-month basis.
WTR has created a culture of disciplined performance, which will continue to drive efficiencies. Further, recent pruning and realignment has reduced the company’s geographic foot print, but increased scale in its larger operating areas (Texas and Ohio). In addition, the recent divestures will benefit earnings going forward via better allocation of capital.
Including infrastructure surcharges, rate increases in New Jersey, Pennsylvania, Florida, Ohio and Illinois have added $41-plus million to rates year to date; Virginia and Texas are pending with $9.3 million in requested annual rates. By the end of 2012, WTR plans to file for $13.5 million in rate increases and surcharges in various service territories. Capital expenditure looks to be in line with 2011, exceeding $300 million.
Brean Murray Carret & Co.
American States Water Company (AWR) had a solid quarter. Contributing to the 2Q2012 results were the following factors:
One, an increase in the water margin of $0.05 per share, due to an increase in rates approved by the California Public Utilities commission (CPUC). It is worth noting that 2012 is the last year of a rate cycle for all of Golden State Water Company’s (GSWC) water regions, and rate increases are typically lowest in the last year of the rate cycle.Rate increases for Regions II and III went into effect Jan. 1, 2012.
Two, earnings from GSWC’s electric operations increased by a penny to $0.04 per share, due to an increase in the electric gross margin, partially offset by increased operating expenses.
Three, earnings contributed by AWR’s contracted services increased by $0.05 to $0.19 per share, due to an increase in construction activities and favorable changes in cost estimates at the Fort Bragg military base in North Carolina. American States Utility Services or ASUS [a unit of AWR] serves Fort Bragg under a 50-year privatization contract with the U.S. government.