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’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
American States Water has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. American States Water has a slightly negative Power Rating of 37 and a poor Appreciation Score of 24, with the Lowest Value Trend Rating the result.
American States Water’s stock is selling well above targeted value. The current stock price of $71.66 compares to targeted value 12 months forward of $53.
American States Water’s low appreciation potential results in an appreciation score of 24 (76% of the universe has greater appreciation potential.)
American States Water has a Power Rating of 37. (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 the recent trend in AWR’s earnings estimates has been favorable.
INVESTMENT PROFILE
AWR’s financial strength is average. Financial strength rating is 56.
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. AWR’s valuation is moderate: moderate dividend yield, moderate 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; and rising leverage.
American States Water’s current technical position is very weak. The stock price is in a 16.1 month down move. The stock has declined 22.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
The stock is currently rated F.
American States Water Co (NYSE: AWR) stock closed at $71.66 on 4/1/24 after a slight decline of -0.8%. NORMAL trading volume accompanied the decline. The stock is unchanged during the last week but has been weak relative to the market over the last nine months.
CASH FLOW
In 2023, American States Water generated a very significant increase in cash of +$8.1 million (+135%). Sources of cash were much larger than uses. Cash generated from 2023 EBITDA totaled +$239.0 million. Non-operating sources contributed +$12.6 million (+5% of EBITDA). Cash taxes consumed -$29.8 million (-12% of EBITDA). Re-investment in the business amounted to -$296.2 million (-124% of EBITDA). On a net basis, debt investors furnished +$140.7 million (+59% of EBITDA) while equity investors received -$58.4 million (-24% 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 slightly below median at +5% of EBITDA (+$12.6 million).
AWR’s Cash Taxes, %EBITDA has exhibited a volatile 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 third quartile. Currently, American States Water is lower quartile at -12% of EBITDA (-$29.8 million).
AWR’s Business Re-investment, %EBITDA has suffered a very strong 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 and second quartile. Currently, American States Water is above median at -124% of EBITDA (-$296.2 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. (Since 2021 Debt Investors, %EBITDA has accelerated very sharply.) In most years, American States Water was in the third quartile and second quartile. Currently, American States Water is substantially above median at +59% of EBITDA (+$140.7 million).
AWR’s Equity Investors, %EBITDA has exhibited a volatile 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 third quartile. Currently, American States Water is substantially below median at -24% of EBITDA (-$58.4 million).
AWR’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the American States Water Peer Group. (Since 2021 Change in Cash, %EBITDA has sharply accelerated.) In most years, American States Water was in the top quartile and lower quartile. Currently, American States Water is upper quartile at +3% of EBITDA (+$8.1 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 second quartile and top quartile. Currently, American States Water is at the upper quartile at +2%.
PROFITABILITY
AWR’s return on equity has improved modestly since 2014. The current level of 16.1% is 1.34X the low for the period and is at the high.
This modest improvement was due to small 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 2014-2023: asset turnover has suffered a strong overall downtrend.
Partially offsetting this trend, however, pretax margin enjoyed a strong overall uptrend that accelerated very sharply from the 2022 level.
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 (16.1%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is upper quartile (7.4%) reflecting asset turnover that is upper quartile (0.27X) and upper quartile pretax margin (28.0%).
Tax “keep” rate (income tax management) is lower quartile (75.0%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is at median (2.89X).
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 2.8% per year.
Total asset growth has been 5.9% per year.
Annual E.P.S. growth has been 7.5% per year.
Equity growth has been 5.6% 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 generally second quartile. E.P.S. growth (7.5%) has been above median. Total asset growth (5.9%) has been at median. Revenue growth (2.8%) has been at median. Equity growth (5.6%) has been at median.
In agreement with this pattern, 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 June, 2013 and April, 2024, American States Water’s stock price rose +167%; relative to the market, this was a -18% loss. Significant price move during the period: 1) August, 2013 – October, 2019: +262%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -18.3% 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 February, 2024 of -18.3% is substantially below median relative to American States Water Co Peer Group.
Current 5-year total return performance of 1.8% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of 1.8% relative to S&P 500 Composite, American States Water’s total return performance is at 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 near the upper quartile. Price/equity ratio is slightly above median. Ratio of enterprise value/assets is at median. Price/earnings ratio is below median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is 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. Ratio of enterprise value/revenue is at the upper quartile. Price/earnings ratio is above median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
American States Water has a 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 5.99X to 5.28X. If AWR’s ratio of enterprise value/revenue were to fall to 5.28X, its stock price would be lower by $-11 to $60.
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 5.99X to 4.80X. If AWR’s ratio of enterprise value/revenue were to fall to 4.80X, its stock price would decline by $-19 from the current level of $72.
VALUE TARGETS
AWR’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
American States Water’s current Price Target of $55 represents a -23% change from the current price of $71.66.
American States Water’s low appreciation potential results in an appreciation score of 24 (76% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 24, the moderately low Power Rating of 37 contributes to an Value Trend Rating of F.
American States Water’s current Price Target is $55 (+1% from the 2023 Target of $55 but -23% from the 04/01/24 price of $71.66). This plateau in the Target is the result of a +5% increase in the equity base and a -4% 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 14.7% — slightly above our recent forecasts. Forecasted return on equity erratic but little changed between 2015 and 2023. The current forecast is above the 2015 peak of 12%.
PTR’s growth forecast is 6.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2019 and 2023. 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 2015 and 2023. The current forecast is above the 2015 low of 6.3%.
At American States Water’s current price of $71.66, 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 11.6% versus a cost of equity of 7.4%.
PTR’s 2025 Price Target of $55 is based on these forecasts and reflects an estimated value of existing assets of $41 and a value of future investments of $14.
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