American Water Works Co. (NYSE:AWK) released its fourth-quarter and full-year 2018 results after the market closed on Tuesday. For the quarter, the country's largest publicly traded water utility posted revenue growth of 3.5% year over year, while earnings per share (EPS) adjusted for one-time factors was flat with the year-ago period.
Adjusted earnings of $0.69 per share met Wall Street's expectation, while revenue of $850 million fell short of the consensus estimate of $862.8 million.
Earnings releases, however, only tell part of the story. Management's comments during earnings calls can often reveal key insights about a company's business performance, prospects, and strategy. Here are three things management shared on the earnings call that investors should know.
1. The company is increasingly deploying smart technology
From CEO Susan Story's remarks:
2018 was a very eventful year for American Water ... [and included] a sharp focus on deploying smart technology.
We have installed additional surface water monitoring panels at all of our major surface water intakes, and we are working on a comprehensive data analytics strategy that will enhance our ability to detect issues and respond accordingly. This will enhance the protections we provide to our customers. [In] phases 2 and 3 of these systems scheduled for this year, we utilize artificial intelligence and machine learning. [Machine learning is a type of artificial intelligence.]
American Water has increasingly been using smart technology, including artificial intelligence (AI), to improve operations, increase efficiency, and decrease costs. During its second-quarter 2018 earnings call, for instance, COO Walter Lynch said that in 2017 the company expanded the use of drones to perform visual tank inspections of above-ground water tanks. Relative to manual inspections, using drones is faster, safer, and provides more detailed data. As part of the drone inspection program, the company also developed software that uses AI "to analyze thousands of images and millions of data points per day to detect deteriorating tank coating," Lynch noted.
2. A core part of the investment thesis for American Water
From Story's remarks:
We've been in business for 133 years and we want to be in business for at least that many more. We have succeeded through world wars, market swings, company ownership changes, macro technology disruptions, and the full continuum of political and regulatory policy. We've provided our shareholders with 140% [total return] over the past five years. We have provided clear and transparent insight into our future with decades of needed investment.
This snippet was part of what top management views as the investment thesis for American Water stock. Story said the impetus for this outline was a nonutility colleague asking her at a recent business dinner, "So with your valuation, why should I invest in American Water?" Indeed, the stock's valuation is quite high, as it's trading at 31.2 times trailing-12-month earnings and 27.6 times projected forward earnings.
While the quote from Story might not contain anything many investors don't already know, except perhaps the total return data, it's included here because this brief, yet powerful, investment thesis is worth keeping in the forefront of your mind if you're a long-term-focused investor. Granted, the stock's valuation is high, but the valuations of many stocks in the market are high given the length of the current bull market. That's why it's particularly important to dollar-cost average your way into your full investment position. Dollar-cost averaging involves investing the same dollar amount in a stock at a set interval, such as quarterly, rather than in one lump sum.
3. The company narrowed Keystone Clearwater's operations
From Story's remarks:
[On] Keystone, ... we shut down the trucking of water business and the construction business and we're focusing on water transfer only. And as we [previously] pointed out, [water transfer] was the most predictable and profitable.
Keystone Clearwater Solutions, which American Water acquired in 2015, services natural gas exploration and production companies working in the Appalachian Basin. Story added that so far in 2019, Keystone's water transfer business has been having a "very strong year."