David E. Parker
Robert W. Baird & Co.
American States Water Company (AWR) reported 2Q’13 EPS of $0.85 meeting our $0.85 estimate and besting consensus by a penny. AWR earned $0.79 in 2Q’12. While earnings benefited from Golden State’s recent rate relief, earnings at American States Utility Services (ASUS) declined from last year’s results, which benefitted from accelerated construction project activity.
We maintain our EPS estimates. We assume American States Utility Services contributes $0.66 in 2013 and about $0.60 in 2014 and 2015. This compares to $0.78 in 2012.
A rebound in construction project activity, additional military base wins, or an improved allowed return on equity could provide upside to our estimates.
In late May, AWR announced a 14.1% dividend increase and 2-for-1 stock split. With a 2014 estimated payout ratio of about 60%, at the low end of the industry average of 60-70%, we believe there is room for additional annual dividend increases.
We assume 5% dividend increase each of the next two years.
Aqua America Inc. (WTR) reported 2Q’13 EPS of $0.38, which compared favorably to our consensus-matching $0.35 estimate.
Year to date, Aqua has received rate increases and infrastructure surcharge mechanisms totaling $11 million (annualized) in five states.
The company has plans to file for an additional approximately $7 million during 2013 in Ohio and New Jersey. On August 2, Aqua filed an $8.6 million (+19%) rate increase in North Carolina.
In mid-May, Aqua announced a 9% dividend increase and 5-for-4 stock split. With a 2013 estimated payout ratio of 50% compared to the industry average of 60-70%, there is room for additional above-average annual dividend increases.
Our $35 price target is about 22.6 times our 2015 earnings per share estimate, a premium to peers when fully valued (currently trading at 18.7 times the 2015 earnings per share), reflecting above-average earnings per share growth opportunities and generally more constructive regulatory mechanisms that provide above-average earned return on equity and enhance earnings stability.
Spencer E. Joyce
J.J.B. Hilliard, W.L. Lyons, LLC
American Water Works (AWK) has in-progress rate cases in five states, which represent $135.4 million in potential additional revenue. Management reaffirmed its 2013 EPS guidance range of $2.15-$2.25. Reflecting the downside to Q2, we are trimming our full-year target to $2.17. Our ’14 target edges down by a penny to $2.41, though our outlook remains largely unchanged.
We reiterate our Buy rating but raise our one-year price target by $1 to $47. We continue to derive our target by applying a 20-times multiple to our forward four quarter EPS estimate, which we believe is appropriate given AWK’s earnings growth and return-on-equity expansion prospects considered in tandem with industry valuations.
Weather is likely the biggest story in AWK’s Q2’13, as cool/wet conditions versus hot/dry conditions in the year-ago period led to year over year declines in revenue, EPS and EBITDA.