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American Water Works' Q1 Earnings Miss Expectations

By Beth McKenna – May 2, 2019 at 8:16AM

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The country's largest publicly traded water utility kicked off 2019 with an earnings miss, though revenue came in stronger than expected.

American Water Works (AWK 3.22%), the largest publicly traded water and wastewater utility in the United States, released first-quarter 2019 results after the market closed on Wednesday. Revenue grew 6.8% and earnings per share (EPS) adjusted for one-time items rose 3.4% year over year. 

The top-line results of $813 million comfortably exceeded Wall Street's expectation of $790.6 million, though adjusted EPS of $0.61 fell short of the consensus estimate of $0.63.

For context, in 2018, the company's revenue edged up 2.5% and adjusted EPS jumped 8.9% year over year.

Shares of American Water have returned 26.2% over the one-year period through Wednesday, outpacing the S&P 500's 12.4% return over this period. 

Water pouring into a glass with blue background.

Image source: Getty Images.

American Water Works' key numbers 

 Metric         Q1 2019    Q1 2018  Change (YOY)  
Revenue $813 million $761 million 6.8%
Net income $113 million $106 million 6.6%
GAAP EPS  $0.62 $0.59 5.1%
Adjusted EPS $0.61 $0.59 3.4%

Data source: American Water Works. YOY = year over year. GAAP = generally accepted accounting principles; EPS = earnings per share.

Adjusted EPS for the reported quarter excludes a liability reduction related to the settlement of the class action lawsuit arising from the Freedom Industries' chemical spill in West Virginia in 2014. This suit alleged that American Water breached its duty to provide clean water to its customers.

Here's how the segments performed in the quarter. 

Segment    

Q1 2019 EPS     

 Q1 2018 EPS         Change (YOY)  
Regulated business $0.59 $0.58 1.7%
Market-based business $0.11 $0.07 57.1%
Parent ($0.09) ($0.6) 50%
Total adjusted EPS $0.61 $0.59 3.4%
Freedom Industries liability reduction $0.01 -- --
GAAP EPS $0.62 $0.59 5.1%

Data source: American Water Works.  

The strong growth in the market-based segment was due to the homeowner services group's acquisition of Pivotal Home Solutions in June 2018 and new partnerships, along with growth in the military services group. Parent company expenses increased significantly, which the company attributed to "higher interest expense, timing of expenses, and a tax adjustment that was favorable in 2018."

Regulated business acquisitions  

In 2019, through April 25, American Water's regulated business has closed on acquisitions that have added 4,700 new customer connections. Moreover, it has an additional 61,000 customer connections under agreement, pending regulatory approval. 

Efficiency slightly improved 

American Water's key adjusted operation and maintenance (O&M) efficiency ratio was 35.5% for the one-year period through the end of the first quarter, a slight improvement from the 35.6% result for the year-ago period. (The lower the ratio, the better.) This ratio reflects how well the company is controlling costs in its regulated business.

The company has made steady progress in improving this metric, which was higher than 44% in 2010. American Water's goal is to achieve 31.5% by 2023.

What management had to say about the quarter and the 9.9% dividend hike

In the earnings release, American Water CEO Susan Story commented on the quarterly results and the company's recent dividend increase:

Our first quarter results demonstrate that American Water employees continue to grow our business through consistent execution of our strategies. Reflecting the company's continued strong performance, the Board of Directors approved a 9.9% increase in our quarterly dividend to $0.50 per share, marking the seventh year in a row the dividend has increased at or above the top of the long-term EPS compound annual growth range.

During the quarter, we saw growth in both our Regulated and Market-Based Businesses. We invested a total of $337 million, the majority of which was in our Regulated Businesses, to better serve our customers and added approximately 7,700 customers to date through closed acquisitions and organic growth. In our Market-Based Businesses, the integration of the Pivotal Home Solutions acquisition and the partnership with Philadelphia are going well.

CFO transition

On the day it released its quarterly results, American Water announced that its CFO Linda Sullivan plans to retire on Aug. 1. She has been the company's financial leader for five years.

"Susan Hardwick will join the company on June 3 and succeed Sullivan as CFO on July 1, ensuring an orderly transition of the position," the company said. Hardwick, who has 35 years of financial experience, most recently was CFO of Vectren Corporation, which was a publicly traded company with significant utility (natural gas and electricity) operations that was recently sold to CenterPoint Energy.

Looking ahead

In the first quarter, American Water's year-over-year adjusted earnings growth of 3.4% was weak. However, the company's quarterly results will be "lumpy" for various reasons and there doesn't appear to be any reason for concern. 

Management affirmed its previously issued full-year 2019 GAAP EPS guidance range of $3.55 to $3.65, and adjusted EPS outlook of $3.54 to $3.64. At the midpoint, 2019 guidance represents growth of 14.3% and 8.8%, respectively, year over year. 

Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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