American States Water (AWR) Gains From Organic Initiatives

On Aug 17, 2016, we issued an updated research report on American States Water Company (NYSE:AWR) . The company is benefiting from its organic initiatives and its strength lies in an expanding customer base, extensive water rights and strong credit ratings. On the flip side, dependence on a single state, California, for the majority of its earnings, highly regulated operations, and ongoing drought conditions in the state could adversely impact results.

Recently, the company reported second-quarter 2016 pro forma earnings of 45 cents per share, on par with the Zacks Consensus Estimate but 9.8% higher than year-ago earnings. The year-over-year increase was due to higher contribution from its Water and Contracted Services segments.

A major portion of American States Water Company’s total revenue comes from its Water segment and water rights are essential for a water service provider. Notably, American States Water has extensive rights to provide fresh water services in its service area.

Moreover, the company’s subsidiary, American States Utility Services, has 50-year contracts with 10 military bases. These long-term defense contracts provide stability to earnings and offer substantial visibility into the financial performance of utilities.

American States Water has some of the highest credit ratings in the water utility space. In Apr 2016, Standard & Poor’s Ratings Services (“S&P”) affirmed its “A+” credit rating on the company. Another water utility, Connecticut Water Service Inc. (NASDAQ:CTWS) also has an ‘A’ credit rating from the same agency.

On the flip side, American States Water only offers services to a single state, California, precisely southern California. So, the financial performance of the company is largely dependent on the political, water supply, labor, utility cost and regulatory risks, economic conditions, natural disasters and other risks affecting the state.

At present, nearly 60% of California is affected by severe drought. Since the company derives the majority of its revenues from this state, continuation of such weather extremities could hurt its prospects significantly.

Also, American States Water operates in a highly regulated environment and any changes in the existing laws and conditions could have an adverse impact on the business of the company.

Zacks Rank & Key Picks

American States Water currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the water utility space include Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS) and Veolia Environnement (PA:VIE) S.A. (OTC:VEOEY) . Both the stocks carry a Zacks Rank #2 (Buy).

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