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American Water Works Earnings Preview: What to Watch

By Beth McKenna – May 5, 2020 at 2:13PM

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On Wednesday after the closing bell, investors will find out how the coronavirus pandemic affected the water utility giant's Q1 results.

American Water Works (AWK -2.54%) is slated to release its first-quarter 2020 results after the market close on Wednesday, May 6.  

Shares of the largest publicly traded U.S. water and wastewater utility held up relatively well during the coronavirus-driven market sell-off that began in mid-February and got worse in March. In 2020, the stock (including dividends) is down less than 1% through May 4, while the S&P 500 (including dividends) is in the red 11.5% over this period. 

This will be American Water's first earnings release and call under CEO Walter Lynch. Lynch, formerly the company's longtime COO, succeeded Susan Story, who retired on April 1.

I'm sure many analysts and investors will miss Story, who's a class act and brought some personality to the earnings calls. Moreover, she led the company during a time when its stock significantly outperformed the market. 

Here's what to watch in the company's upcoming report.

Drops of water falling into a very deep blue body of water and causing ripples.

Image source: Getty Images.

Key quarterly numbers

Here are American Water's results for the year-ago period and Wall Street's estimates to use as benchmarks.

Metric

Q1 2019 Result

Wall Street's Q1 2020 Consensus Estimate

Wall Street's Projected Growth 

Revenue

$813 million

$826.4 million

1.6%

Adjusted EPS

$0.61

$0.66

8.2%

Data sources: American Water Works and Yahoo! Finance. EPS = earnings per share. 

Coronavirus impact

Investors can expect American Water's results will show that its business was negatively affected by the COVID-19 pandemic. Since mid-to-late March, most of the commercial and industrial customers in its 16 regulated states have been temporarily closed to help slow the spread of the virus. (The company has regulated operations in these states: New Jersey, Pennsylvania, Missouri, Illinois, California, Indiana, West Virginia, Georgia, Hawaii, Iowa, Kentucky, Maryland, Michigan, New York, Tennessee, and Virginia.)

Many states have just started or plan to soon start slowly opening their economies, but for the most part, non-essential businesses remain closed. A high-profile exception in the above list is Georgia, which late last month gave the green light to many businesses to open.

American Water's revenue shouldn't take a huge hit because most of its revenue is generated from its consumer accounts, or households, and only about the last couple of weeks of the quarter were affected by the pandemic.

Analysts expect Q1 revenue to grow 1.8% year over year. For context, in 2019, revenue grew 4.9%. 

The company's profit should also be negatively impacted by the crisis. The hit to revenue will likely carry through to the bottom line. Moreover, the company probably incurred some additional expenses associated with social distancing and keeping its essential employees safe.

Indeed, the Wall Street consensus adjusted earnings estimate has dropped from $0.73 two months ago to $0.66 currently. 

O&M efficiency ratio

Investors should continue to monitor American Water's operation and maintenance (O&M) efficiency ratio. This ratio, which is for the trailing one-year period, reflects how well the company is controlling costs in its regulated business. The lower this number, the better.

In 2019, this ratio was 34.5%, an improvement from 35.6% in 2018. The company's goal is to achieve 31.5% by 2023.

2020 guidance

Last quarter, management reiterated its 2020 guidance, which it had announced in December ahead of the company's annual investor day. Many companies are either pulling their 2020 outlooks or lowering them because of uncertainties surrounding the pandemic. There's a possibility American Water could do the same, though that wouldn't be cause for concern. Its business should quickly spring back once its non-residential customers are permitted to open. 

For 2020, the company had guided for adjusted earnings to be in the range of $3.79 to $3.89 per share, which would mark growth of 5% to 7.8% year over year. Moreover, it expects the long-term adjusted earnings growth rate to be between 7% and 10%, anchored off the 2018 result. (The company doesn't provide revenue guidance.)   

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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American Water Works Company, Inc. Stock Quote
American Water Works Company, Inc.
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