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.