Please ensure Javascript is enabled for purposes of website accessibility

American Water Works Earnings Preview: What to Watch on Nov. 4

By Beth McKenna – Oct 28, 2020 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors will soon find out how the COVID-19 pandemic affected the leading U.S. water utility's third-quarter results.

American Water Works (AWK -0.60%) is slated to release its third-quarter 2020 results after the market close on Wednesday, Nov. 4. Its analyst earnings call is scheduled for the following day at 9 a.m. EST.   

The largest U.S. water utility's business has been quite resilient during the COVID-19 pandemic, thanks to the essential nature of water and wastewater services. Its regulated utility business has been slightly hurt by the crisis because of the decline in demand from commercial and industrial customers, many of which were temporarily closed during the early stages of the pandemic. However, that partial evaporation of usual demand has been partly offset by the rise in residential water use, driven largely by more people working from home.

In 2020, American Water stock has returned 27.4% through Oct. 27, making it the second-best performer among the 28 utility stocks on the S&P 500 index. Only shares of NextEra Energy, the country's largest electric utility, have performed better (though just a tad), returning 27.5% so far this year. The S&P 500 has returned 6.5% over the same period.

Here's what to watch in American Water's upcoming report.

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

Image source: Getty Images.

Key numbers 

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

Metric

Q3 2019 Result

Wall Street Q3 2020 Consensus Estimate

Wall Street's Projected Growth 

Revenue

$1.01 billion

$1.11 billion

9.9%

Adjusted earnings per share (EPS)

$1.33

$1.38

3.8%

Data sources: American Water Works and Yahoo! Finance. 

For context, in the second quarter, American Water's revenue rose 5.6% year over year to $931 million, easily beating the $917 million that Wall Street had been expecting. Adjusted EPS increased 6.4% to $1.00. This result also beat the consensus estimate, which was $0.96. 

The company's military services operation, one of its market-based businesses, should get a boost from becoming fully operational on June 1 at its two new bases, Joint Base San Antonio and U.S. Military Academy at West Point. The company won these contracts last year.

O&M efficiency ratio

Investors should continue to monitor American Water's adjusted 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 the number, the better.

Last quarter, this ratio was 34.3%, an improvement from 35.2% in the year-ago period. In recent years, the company has been making solid and steady progress in improving this ratio. Its goal is to achieve 31.5% by 2023.

2020 guidance

For full-year 2020, management guided for adjusted EPS to be in the range of $3.78 to $3.91. This represents expected growth of 4.7% to 8.3% over 2019.

This outlook includes an estimated $0.06 positive impact for depreciation not recorded as required by the accounting for assets held for sale and an estimated $0.05 to $0.08 in costs associated with the pandemic.

American Water doesn't provide revenue guidance. 

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

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.