2023-05-12 07:28:35 ET
Summary
- American States Water Company recently beat earnings expectations demonstrating their outperformance over the years.
- The company has beaten the S&P 500 in the last decade when adjusting for dividends.
- Infrastructure upgrades over the years will foster growth through increased cashflows from expanded margins.
- Assuming my DCF figures, American States Water Company is currently overvalued, resulting in a hold rating.
American States Water Company (AWR) has displayed consistent growth through share appreciation and dividends over the past several decades. I believe American States Water Company is a hold due to their consistent dividend, infrastructure upgrades resulting in margin expansion, and overvaluation assuming my DCF figures.
Business Overview
American States Water Company and its subsidiaries offer water and electric services to diverse customers, including residential, commercial, and industrial sectors in the US. The company has over 800 employees and operates through three segments, namely Water, Electric, and Contracted Services. Its activities include procuring, producing, distributing, and vending water, as well as distributing electricity. Specifically, the company provided water service to about 263,265 customers residing in ten counties in California as of December 31, 2022. It also distributed electricity to around 24,705 customers in mountain communities located in San Bernardino County, California. Moreover, American States Water Company provides water and/or wastewater services, including constructing, operating, and maintaining facilities at water and/or wastewater systems at various military installations.
With a market capitalization of $3.406 billion, a 52-week high of $100.51, and a low of $71.22, a price of $89.46 with a 30.80 P/E for American States Water Company displays a price that is off of its highs and a P/E that is far above average for a utility company signaling possible overvaluation.
American Water also pays a healthy dividend of 1.76% representing a safe payout ratio of 72.19%. This allows American Water to reward shareholders constantly while also using FCF to generate value through acquisitions to foster growth in several segments and diversify revenues.
Despite facing moderate economic headwinds, American States Water Company surpassed expectations in Q1 2023 with earnings per share of $0.93 , beating estimates by $0.30, and revenue of $161.42 million, surpassing expectations by $48.42 million. The company's ability to maintain its performance underscores its capacity to capitalize on market trends and leverage its diverse range of subsidiaries to mitigate headwinds.
Outperforming the Broader Market
By consistently reinvesting in its core business model, American States Water has been able to exceed the performance of the S&P 500 over the past decade, taking into account dividends. This sustained success over time showcases the company's impressive capacity to allocate capital effectively, which is expected to persist in the future.
American States Water Company Compared to S&P (Created by author using Bar Charts)
Infrastructure Upgrades Fostering Growth
American States Water Company has spent a lot of money updating and modernizing its infrastructure over the course of its existence, including its water treatment facilities, pipelines, and distribution networks. These modifications have raised the quality of the water and wastewater services the firm offers to its clients as well as the efficiency and dependability of the company's operations.
The ongoing modernization of the water treatment facility in the San Gabriel Valley District of Golden State Water Company, which provides service to clients in some areas of California's Los Angeles and San Bernardino counties, is a perfect illustration of the company's infrastructure improvements. The present microfiltration system will be swapped out for a brand-new, cutting-edge reverse osmosis treatment system as part of this treatment plant update. The new reverse osmosis system is made to eliminate impurities like salts, minerals, and organic debris that can alter the taste and odor of the water, as well as to improve the quality of treated water and increase the effectiveness of the treatment process.
Additionally, as part of this renovation, the corporation is also installing new, more effective pumps, motors, and control systems. These improvements are anticipated to save energy usage, boost dependability, and lower operating costs, all of which will result in improved margins.
Customer satisfaction along with margins will increase which will allow for these enhancements to make the business run more smoothly, produce better future cash flows, and raise the possibility of future acquisitions or further development of its current subsidiaries. In the end, these improvements are a part of the business's larger growth strategy to offer its clients high-quality water and wastewater services while enhancing operational effectiveness and cutting costs.
Company Website
Analyst Consensus
Analyst consensus rates American States Water Company as a "sell". Although the company has been able to improve upon operations and expand, its high valuation does not display much value in analysts' opinion with an average 1Y price target of $93.33 presenting a 4.33% upside.
Valuation
Prior to making any assumptions or conducting a DCF analysis, I will first determine the Cost of Equity for American States Water by utilizing the Capital Asset Pricing Model. With a risk-free rate of 3.39%, I concluded that the Cost of Equity is 6.92%, which is demonstrated below.
Created by author using Alpha Spread
After conducting a 10-year DCF analysis utilizing net income as the basis, I have determined that American States Water Company is presently overvalued by 30%, and its fair value is approximately $62.92. To calculate this, I employed a discount rate of 7% over a five-year period and assumed a mid-single-digit revenue growth rate beyond 2023. Additionally, I factored in the assumption that the company will continue to invest in infrastructure upgrades to reduce costs and improve water quality, resulting in modestly improved margins over time.
Created by author using Alpha Spread
Risks
Macroeconomic Headwinds: Due to the likelihood of having limited access to large funds as a result of rising rates, American States Water Company may experience growth issues as a potential recession approaches in the upcoming year. Given its status as a utility firm, the company's revenue is anticipated to be less affected by this challenge than the market as a whole.
Regulatory Policy: Utility firms are exposed to a number of hazards because of their business strategies, the regulatory environment, as well as tax, environmental, and climate policies. Utility companies may experience uncertainty as a result of regulatory changes, and environmental and climate policies may increase costs or cause service interruptions.
Conclusion
To summarize, I believe that American States Water Company is a hold due to its consistent dividend and ability to utilize existing infrastructure to further expand. But, assuming my DCF figures, the company is overvalued resulting in my rating.
For further details see:
American States Water: Revitalized Infrastructure Powers Growth