American Water Works Co. (AWK 1.00%) released strong fourth-quarter and solid full-year 2017 earnings after the market close on Tuesday. For the quarter, the country's largest publicly traded water and wastewater utility posted year-over-year revenue and adjusted earnings per share (EPS) growth of 24% and 21%, respectively.
Management attributed the robust fourth-quarter results primarily to continued growth in its core regulated business, driven mainly by infrastructure investment, acquisitions, and organic growth. The market-based business added very slightly to the quarter's earnings growth.
Shares of American Water have returned 10.8% over the one-year period through Tuesday, versus the S&P 500's 17.8% return. The stock had a great 2017, returning 29%, but has pulled back significantly in 2018, along with the group in general. The stock, however, has handily quenched investors' thirst for market-beating returns over periods of three years and longer.
Here's how the quarter worked out for American Water and its investors.
Image source: Getty Images.
American Water Works' key quarterly numbers
| Metric | Q4 2017 | Q4 2016 | Change (YOY) |
|---|---|---|---|
| Revenue | $821 million | $802 million | 23.7% |
| Operating income | $279 million | $248 million | 12.5% |
| Net income | ($1 million) | $101 million | N/A |
| Earnings per share (EPS) | ($0.01) | $0.57 | N/A |
| Adjusted EPS | $0.69 | $0.57 | 21.1% |
Data source: American Water Works. YOY = year over year.
EPS based on generally accepted accounting principles (GAAP) includes a non-cash charge associated with the recent U.S. tax reform legislation. The adjusted figure -- which is what investors should consider -- strips this item out.
Wall Street analysts were looking for adjusted EPS of $0.66 on revenue of $843.4 million, so American Water fell short of the revenue consensus but beat on the bottom line.
For the full year 2017, year-over-year revenue increased 17% to $3.36 billion and adjusted EPS came in at $3.03, representing a 6.7% increase from 2016.
Performance by segment
| Segment |
Q4 2017 Adjusted EPS |
Q4 2016 Adjusted EPS | Change (YOY) |
|---|---|---|---|
| Regulated business | $0.66 | $0.55 | 20% |
| Market-based business | $0.08 | $0.07 | 14.3% |
| Parent | ($0.05) | ($0.05) | -- |
| Total adjusted EPS | $0.69 | $0.57 | 21.1% |
Data source: American Water Works.
In its core regulated business, American Water's revenue increased by $16 million from the year-ago quarter, which flowed through the income statement to boost adjusted net income to $119 million, up from $98 million. The rise in revenue was driven by a $27 million increase from additional revenue and surcharges associated with infrastructure investments, acquisitions, and organic growth, which was partially offset by a $11 million decrease from lower water demand, of which $3 million was due to warmer weather in the fourth quarter of 2016.
The market-based business' adjusted net income was $14 million, up from $13 million in the year-ago period. This increase was driven by growth in the homeowner services business, resulting from an increase in the number of customers and price increases for certain customers, and offset by lower capital upgrades in the military services group.
Efficiency continues to improve
American Water's key operation and maintenance (O&M) efficiency ratio for 2017 was 33.8%, which is an improvement from 34.9% in 2016. (The lower the ratio, the better.) This ratio reflects how well the company is controlling costs in its regulated business.
The water utility giant has been steadily improving this ratio, as it was above 44% in 2010. Its goal is to achieve 32.5% by 2021.
What management had to say
Here's what CEO Susan Story had to say in the press release:
This past year was one of continued solid growth for American Water and outstanding execution by our employees. With a strong fourth quarter finish, our 2017 adjusted EPS increased 7 percent over 2016. To meet the nationally recognized need for significantly more water infrastructure investment, we invested more capital in our water ad wastewater systems -- $1.4 billion -- than in any other previous year. As importantly, we achieved our best ever O&M efficiency ratio in order to make this investment more affordable for our customers.
We will continue to focus on delivering our customers the most reliable and safe water services at an affordable price in 2018 and beyond, and the recent Tax Cuts and Jobs Act will aid us even more in doing so.
Looking ahead
American Water turned in a strong quarter, capping off a solid -- though not robust -- 2017. The company reaffirmed its previously released earnings guidance for 2018: It expects adjusted EPS to be in the range of $3.22 to $3.32. 2017 adjusted EPS was $3.03, so this guidance represents projected growth of 6.3% to 9.6%.
Story said management remains "confident in our ability to achieve our long-term EPS growth [goal] of 7 to 10 percent." This goal was established using 2015 as the base year and is for the time period through 2020.
