American Water Works Banks On Investments & Acquisitions

On May 23, 2016, we initiated a research report on American Water Works Company, Inc. (NYSE:AWK) . This water supply and wastewater service provider makes systematic investments to upgrade and expand its water and wastewater infrastructure. In addition, the company’s inorganic growth strategy is helping it to expand operations as well as market reach. However, fluctuations in weather patterns could hurt its services. Rising interest rates is another headwind for these capital intensive water utilities.

American Water Works’ first-quarter 2016 results were impressive with both its earnings and total revenue beating the respective Zacks Consensus Estimate. The solid performance was primarily backed by its investments in regulated operations.

The company aims to invest $6.4 billion in the 2016–2020 time frame, which will help it to boost earnings by 7–10% per year during the period. Of this, $5.5 billion will be deployed for strengthening its regulated businesses.

We note that the U.S. water utility market is quite fragmented. As a result, consolidation of the space is the need of the hour as it will strengthen and expand the existing water and wastewater systems of the country. Large operators have the required financial strength to undertake such large capital expenditure projects and make strategically prudent acquisitions.

American Water Works continues to expand its market footprint through strategic acquisitions. During the first quarter, the company has closed seven acquisitions, expanding its customer base by 6,868. Further, it is pursuing the takeover of seven additional companies, which will add another 33,752 customers. Another major operator in the water and wastewater space, Aqua America Inc. (NYSE:WTR) has recently forayed into the states of Pennsylvania, North Carolina, Indiana and Illinois through seven acquisitions during the first three months of 2016, increasing its customer count by 4,722.

On the flip side, the company is subject to various environmental, water quality, and health and safety laws and regulations. In a bid to comply with increasingly stringent laws and regulations, the company may incur higher operating costs, which could dent its top line significantly.

Moreover, the existing water system in the U.S. is aging and may fail at any point of time despite ongoing repairs and overhauls. Any damage in the network of water and wastewater pipes, and water reservoirs could result in heavy losses for the company’s financial condition.

American Water Works currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

A couple of better-ranked stocks in the same space are Artesian Resources Corporation (NASDAQ:ARTNA) and SABESP (NYSE:SBS) , both carrying a Zacks Rank #2 (Buy).