Shares of American States Water (NYSE:AWR), a water utility that provides services to more than 260,000 customers throughout California, climbed more than 9% in October following the announcement of a newly signed deal with the U.S. Army.
In addition to its operations in California's regulated water markets, American States Water distributes electricity to Southern California's recreational area, Big Bear. The company also has a presence in the nonregulated market through its subsidiary, which provides contracted services for water and wastewater systems to the U.S. government.
Accounting for 70% of revenue in fiscal 2016, the regulated market segment is where American States Water makes its hay. The company, however, has faced strong headwinds due to the drought that has devastated California. From fiscal years 2013 to 2016, the company reported an 8% decrease in revenue and a 29% drop in operational cash flow, according to Morningstar.
Things seemed to turn a corner last April, though, when California's governor declared an end to the drought state of emergency in most of the state. American States Water, likewise, cut back on some of the emergency measures it had taken in response to the water shortage. But not everyone is convinced that California is out of the woods just yet, and the fires that ravaged the state have been a harsh reminder that California is far from impervious to Mother Nature.
It's understandable, therefore, why investors celebrated the company's early October announcement that the U.S. government had awarded the company a contract, one that has an estimated value of $601 million over a 50-year period and is subject to annual price adjustments, to provide various water and wastewater treatment services at the U.S. Army's Fort Riley in Kansas.
With the signing of this agreement, American States Water expands its geographic footprint to a new state. Aside from its monetary value, the contract is so advantageous because it provides further geographic diversification for the company as it gains a foothold in the Midwest, essentially mitigating the risk of its concentrated operations in California.
Winning the award for Fort Riley, American States Water now provides its services to 11 military installations in eight states. And, presumably, investors can expect to see continued activity with its contracted-services subsidiary since management recognizes it as important to the company's future success. In the company's press release for the deal, Robert J. Sprowls, the company's president and CEO, articulated this clearly: "This win marks another important milestone in the growth strategy of our contracted services business and we are well positioned to continue competing for new contracts in the future."
Moving forward, investors should confirm that the company is successful in executing this strategy. The most important green flag, though, is a return to revenue and cash flow growth, two things that would suggest that the tide has turned for the company.