American Water Works (AWK 0.21%) stock gained 2.9% in after-hours trading on Monday, following the U.S. water and wastewater utility giant's release of its third-quarter report. Investors' positive initial reaction was largely attributable to the quarter's earnings easily surpassing the Wall Street consensus estimate. 

The stock's movement on Tuesday will likely also be influenced by overall market dynamics and the information that management shares on the analyst conference call, which is scheduled for Tuesday at 9 a.m. ET. 

American Water's key numbers 

Metric Q3 2022 Q3 2021 Change
Revenue $1.08 billion $1.09 billion (0.9%)
Operating income $439 million $417 million 5.3%
Net income $297 million  $278 million 6.8%
Earnings per share (EPS) $1.63 $1.53 6.5%

Data source: American Water Works.

Revenue beat the $1.07 billion that analysts had expected. Although it edged down slightly from the year-ago period, it's no reason for concern. Revenue performance was actually quite solid and better than suggested by the above metrics. The top line declined because the company sold its homeowner services (HOS) business and regulated utility operations in New York and Michigan over the last year. 

Earnings came in higher than the $1.51 per share that Wall Street had projected. Growth was primarily driven by higher rates in the regulated businesses, partly offset by inflationary pressures on production costs and higher interest rates.

EPS got a $0.07 boost from "favorable weather," which primarily means that the quarter's weather was warmer and drier in the company's service territory relative to the year-ago period. On the other hand, the year-over-year EPS comparison was hurt by the sale of the previously mentioned divestitures. The combined net headwind to EPS from these divestitures was $0.12.

Acquisition activity during the quarter 

American Water continued its solid pace of acquiring regulated water and wastewater utilities. In 2022 through the third quarter, it added approximately 65,300 customer connections through 15 closed acquisitions across six states. The total price of these acquisitions was $308 million.

The company also had 29 acquisitions across nine states under agreement, as of the end of the third quarter. These acquisitions -- which have a total price of $118 million -- will add about 21,600 customer connections. For context, last year, the company completed 23 regulated acquisitions.

A large acquisition made after the quarter ended

Soon after the third quarter ended, American Water made one of its largest acquisitions. In mid-October, it signed an agreement to acquire the wastewater-system assets of the Butler Area Sewer Authority in western Pennsylvania for a purchase price of $232 million. This deal will add about 14,700 customer connections and is expected to close in 2023. 

Including the acquisitions that haven't yet closed, American Water has roughly 1.3 million customer connections.

What the CEO had to say 

Here's part of what CEO Susan Hardwick had to say in the earnings release: 

We made great progress in executing our regulatory and acquisition strategies these last few months. Achieving settlements in the rate cases in our two largest jurisdictions, New Jersey and Pennsylvania, is a constructive step forward for our customers and our operations in each state.

[Comment about the large acquisition made in October, which was discussed above.] We remain firmly on track for a strong finish to 2022 and look forward to continuing to deliver on our strategies in 2023. 

Guidance

For 2022, American Water Works reaffirmed its earnings-per-share guidance of $4.39 to $4.49 on a weather-normalized basis. For 2023, the company guided for EPS of $4.72 to $4.82, also on a weather-normalized basis.

EPS guidance isn't straightforward because of the "weather normalized" factor. It's probably easier to keep in mind the company's long-term guidance: Over the next five years (2023-2027), management expects a weather-normalized EPS compound annual growth rate of 7% to 9%.

For the same five-year period, management also guided for annual dividend growth of 7% to 9%. For a water utility, 7% to 9% annual earnings growth and dividend hikes are quite robust.