American Water Works (AWK 1.24%), the largest publicly traded water and wastewater utility in the United States, released strong third-quarter 2019 results after the market closed on Wednesday, Oct. 30.
Shares popped 1.9% the following day. We can attribute the market's reaction, at least in part, to earnings beating Wall Street's consensus estimate, along with management edging up the midpoint of its full-year 2019 guidance range for reported and adjusted earnings. Moreover, shares may have gotten a tailwind from the Federal Reserve's Oct. 30 surprise announcement of a .25% interest rate cut.
American Water stock has returned 37.1% this year through Nov. 1, outpacing the broader market's 24.4% return over this period. That showing makes it the second-best-performing U.S. water utility stock behind American States Water, which has returned 42% so far in 2019.
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American Water's key numbers
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $1.013 billion | $976 million | 3.8% |
| Net income | $240 million | $187 million | 28.3% |
| GAAP EPS | $1.33 | $1.04 | 27.9% |
| Adjusted EPS | $1.33 | $1.20 | 10.8% |
Data source: American Water. GAAP = generally accepted accounting principles; EPS = earnings per share.
Wall Street was looking for the New Jersey-based company to turn in adjusted EPS of $1.30, and American Water surpassed this expectation.
Here's how the segments performed in the quarter.
| Segment | Q3 2019 EPS | Q3 2018 EPS | Change |
|---|---|---|---|
| Regulated business | $1.30 | $1.18 | 10.2% |
| Market-based business | $0.12 | $0.12 | -- |
| Parent and other | ($0.09) | ($0.10) | Loss decreased 10% |
| Total adjusted EPS | $1.33 | $1.20 | 10.8% |
| Keystone* impairment | -- | ($0.22) | -- |
| Gain on sale | -- | $0.06 | -- |
| GAAP EPS | $1.33 | $1.04 | 27.9% |
Data source: American Water. *Keystone Clearwater Solutions is a market-based business that provides water to natural gas exploration and production companies working in the Appalachian Basin.
Regulated business customer growth
In 2019, through Oct. 31, American Water's regulated business has closed on acquisitions that have added 46,900 new customer connections. Moreover, it has an additional 26,400 customer connections under agreement, pending regulatory approval.
Additionally, the company experienced organic growth of 10,400 customer connections.
Market-based business growth
American Water's homeowner services business continues its strong performance. Moreover, the company's military services group was awarded long-term contracts for two new bases: Joint Base San Antonio and West Point Military Academy.
Efficiency improved
American Water's key adjusted operation and maintenance efficiency ratio was 35% for the one-year period through the end of the third quarter, an improvement from 35.7% in 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's goal is to achieve 31.5% by 2023. Considering that this ratio was more than 44% in 2010, that goal seems attainable.
What management had to say
Here's what American Water CEO Susan Story had to say in the earnings release:
American Water employees delivered a strong third quarter with 2019 earnings per share up 10.8% compared to last year's adjusted results. Our third quarter results demonstrate that we continue to grow our business through the consistent execution of our strategies. During the quarter, we saw growth in both our Regulated and Market-Based Businesses.
Through September, we invested about $1.3 billion, the vast majority of which was regulated capital investment in infrastructure, to better serve our customers. We also added more than 57,000 customer connections to date through closed acquisitions and organic growth. This includes the closing on the acquisition of the water assets in Lake Station, Indiana, and the Steelton Borough Water Authority in Pennsylvania, as well as the wastewater assets of Exeter Township, Pennsylvania. We also look forward to welcoming an additional 26,400 customer connections in the coming months through pending acquisitions.
The successful execution of our strategies along with our strong financial performance allows us to narrow our adjusted earnings guidance range to $3.56 to $3.64 per share.
Guidance
Management edged up the bottom number of its outlook range for both GAAP EPS and adjusted EPS.
| Metric | Prior Guidance | New Guidance | Projected Growth at Midpoint (YOY) |
|---|---|---|---|
| GAAP EPS | $3.55 to $3.65 | $3.57 to $3.65 | 14.6% |
| Adjusted EPS | $3.54 to $3.64 | $3.56 to $3.64 | 9.1% |
Data source: American Water. YOY = year over year.
This is great projected earnings growth for a water utility.
