BUSINESS
American States Water Company, through its subsidiaries, provides water and electric services to residential, commercial, industrial, and other customers in the United States. It operates through three segments: Water, Electric, and Contracted Services. The company purchases, produces, distributes, and sells water, as well as distributes electricity. As of December 31, 2021, American States Water Company provided water service to 262,770 customers located throughout 10 counties in the State of California; and distributed electricity to 24,656 customers in San Bernardino County mountain communities in California. The company also provides water and/or wastewater services, including the operation, maintenance, and construction of facilities at the water and/or wastewater systems at various military installations.
INVESTMENT RATING
AWR is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
American States Water has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. American States Water has a slightly negative Power Rating of 40 and a poor Appreciation Score of 19, and the Lowest Value Trend Rating results.
American States Water’s stock is selling significantly above targeted value. The current stock price of $76.15 compares to targeted value 12 months forward of $51.
American States Water’s low appreciation potential results in an appreciation score of 19 (81% of the universe has greater appreciation potential.)
American States Water has a Power Rating of 40. (This slightly negative Power Rating indicates that AWR’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been slightly unfavorable; and the Water Supply comparison group is in a slightly weakened position currently. An offsetting factor is earnings estimate behavior for AWR has been slightly favorable recently.
INVESTMENT PROFILE
AWR’s financial strength is average. Financial strength rating is 51.
Relative to the S&P 500 Composite, American States Water Co has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that AWR is lower risk. All factors are relative strengths. Low financial strength is a relative weakness for AWR. AWR’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. AWR has unusually low market capitalization.
CURRENT SIGNALS
American States Water’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.
American States Water’s current technical position is very weak. The stock price is in a 14.2 month down move. The stock has declined 19.7% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Slight positive changes in fundamentals have recently occurred for American States Water Co (NYSE: AWR): significant quarterly sales acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of F. This review will be completed in the next several days.
American States Water Co (NYSE: AWR) has reported earnings for its fourth fiscal quarter (ending December 31) of $0.55 versus $0.50 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $3.37 versus $2.11 for the same period a year ago.
American States Water Co (NYSE: AWR) stock declined slightly by -0.2% on 2/21/24. The stock closed at $76.15. However, this decline was accompanied by below average trading volume at 73% of normal. The stock has declined -1.1% during the last week and has been weak relative to the market over the last nine months.
CASH FLOW
In 2022, American States Water generated a significant increase in cash of +$1.0 million (+21%). Sources of cash were larger than uses. Cash generated from 2022 EBITDA totaled +$167.9 million. Non-operating sources contributed +$2.5 million (+2% of EBITDA). Cash taxes consumed -$14.3 million (-9% of EBITDA). Re-investment in the business amounted to -$178.6 million (-106% of EBITDA). On a net basis, debt investors supplied +$78.4 million (+47% of EBITDA) while equity investors pulled out -$54.8 million (-33% of EBITDA).
AWR’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the American States Water Peer Group. In most years, American States Water was in the third quartile and second quartile. Currently, American States Water is substantially below median at +2% of EBITDA (+$2.5 million).
AWR’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the American States Water Peer Group. In most years, American States Water was in the lower quartile and third quartile. Currently, American States Water is lower quartile at -9% of EBITDA (-$14.3 million).
AWR’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the American States Water Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated sharply.) In most years, American States Water was in the top quartile. Currently, American States Water is slightly above median at -106% of EBITDA (-$178.6 million).
AWR’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the American States Water Peer Group. In most years, American States Water was in the lower quartile and top quartile. Currently, American States Water is at the upper quartile at +47% of EBITDA (+$78.4 million).
AWR’s Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the American States Water Peer Group as well. In most years, American States Water was in the third quartile and lower quartile. Currently, American States Water is lower quartile at -33% of EBITDA (-$54.8 million).
AWR’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the American States Water Peer Group as well. In most years, American States Water was in the top quartile and lower quartile. Currently, American States Water is slightly above median at +1% of EBITDA (+$1.0 million).
AWR’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by stability for the American States Water Peer Group. In most years, American States Water was in the top quartile and lower quartile. Currently, American States Water is slightly above median at +1%.
PROFITABILITY
AWR’s return on equity has improved slightly since 2013. The current level of 16.0% is 1.25X the low for the period and is at the high.
This slight improvement was due to minor negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of AWR’s assets declined over the full period 2013-2023: asset turnover has suffered a strong overall downtrend.
AWR’s pretax margin has exhibited a minor overall uptrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
AWR’s return on equity is upper quartile (16.0%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is upper quartile (7.3%) reflecting asset turnover that is substantially above median (0.27X) and upper quartile pretax margin (27.1%).
Tax “keep” rate (income tax management) is lower quartile (76.3%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is at median (2.86X).
GROWTH RATES
There are no significant differences between American States Water’s longer term growth and growth in recent years.
American States Water’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 2.1% per year.
Total asset growth has been 5.7% per year.
Annual E.P.S. growth has been 6.0% per year.
Equity growth has been 5.3% per year.
American States Water’s consensus growth rate forecast (average of Wall Street analysts) is 14.0% — substantially above the average of the historical growth measures.
Relative to the American States Water Peer Group, American States Water’s historical growth measures are erratic. E.P.S. growth (6.0%) has been at median. Equity growth (5.3%) has been at median. Revenue growth (2.1%) has been slightly below median. Total asset growth (5.7%) has been at the lower quartile.
Consensus growth forecast (14.0%) is upper quartile.
PRICE HISTORY
Over the full time period, American States Water’s stock price performance has been slightly below market. Between April, 2013 and February, 2024, American States Water’s stock price rose +175%; relative to the market, this was a -12% loss. Significant price move during the period: 1) August, 2013 – October, 2019: +262%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -19.2% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -19.2% is below median relative to American States Water Co Peer Group.
Current 5-year total return performance of 3.7% is substantially below median relative to the S&P 500 Composite.
Through January, 2024, with substantially below median current 5-year total return of 3.7% relative to S&P 500 Composite, American States Water’s total return performance is above median relative to American States Water Co Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, AWR’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is at the upper quartile. Price/equity ratio is slightly above median. Ratio of enterprise value/assets is slightly above median. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly below median.
Relative to American States Water Peer Group, AWR’s overall valuation is high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/earnings ratio is at the upper quartile. Ratio of enterprise value/revenue is at the upper quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is at the lower quartile.
American States Water has a very large value gap compared to the median valuation. For AWR to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 6.17X to 5.22X. If AWR’s ratio of enterprise value/revenue were to fall to 5.22X, its stock price would be lower by $-15 to $61.
For AWR to fall to lower quartile valuation relative to the American States Water Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 6.17X to 4.34X. If AWR’s ratio of enterprise value/revenue were to fall to 4.34X, its stock price would decline by $-29 from the current level of $76.
VALUE TARGETS
AWR is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
American States Water’s current Price Target of $50 represents a -34% change from the current price of $76.15.
American States Water’s low appreciation potential results in an appreciation score of 19 (81% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 19, the moderately low Power Rating of 40 contributes to an Value Trend Rating of F.
American States Water’s current Price Target is $50 (+1% from the 2022 Target of $50 but -34% from the 02/21/24 price of $76.15). This plateau in the Target is the result of a +4% increase in the equity base and a -3% decrease in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 14.6% — in line with our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2014 and 2022. The current forecast is above the 2014 low of 11%.
PTR’s growth forecast is 6.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2019 and 2022. The current forecast is above the 2019 low of 3%.
PTR’s cost of equity forecast is 8.8% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2014 and 2022. The current forecast is above the 2014 low of 5.4%.
At American States Water’s current price of $76.15, investors are placing a positive value of $32 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 9.0% per year, and a return on equity of 11.0% versus a cost of equity of 7.0%.
PTR’s 2024 Price Target of $50 is based on these forecasts and reflects an estimated value of existing assets of $45 and a value of future investments of $5.
Be the first to comment