Breaking Down American Water Works Company, Inc. (AWK) Financial Health: Key Insights for Investors

Understanding American Water Works Company, Inc. (AWK) Revenue Streams

Understanding American Water Works Company, Inc.’s Revenue Streams

American Water Works Company, Inc. generates revenue primarily through its regulated businesses, which provide water and wastewater services. The company’s operating revenues for the three months ended September 30, 2024, were $1,219 million, compared to $1,095 million for the same period in 2023, reflecting a year-over-year increase of 11.3%. For the nine months ended September 30, 2024, operating revenues totaled $3,204 million, up from $2,960 million in 2023, marking an increase of 8.2%.

Breakdown of Primary Revenue Sources

The primary revenue streams are categorized into water services and wastewater services. The breakdown is as follows:

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rates for the company are as follows:

• Three months ended September 30, 2024: 11.3% increase from 2023
• Nine months ended September 30, 2024: 8.2% increase from 2023

Contribution of Different Business Segments to Overall Revenue

The regulated businesses segment contributes substantially to overall revenue, with total operating revenues for this segment being $3,204 million, accounting for 94.0% of total revenues for the nine months ended September 30, 2024.

Analysis of Significant Changes in Revenue Streams

Operating revenues increased by $124 million and $244 million for the three and nine months ended September 30, 2024, respectively. This increase was primarily driven by:

• $83 million from authorized rate increases, including infrastructure surcharges
• $11 million from water and wastewater acquisitions
• $20 million from strong demand for services

These increases were partially offset by an estimated net decrease of $8 million due to warm, dry weather in 2023.

Overall, the company's strategic focus on infrastructure investment and regulated acquisitions has significantly enhanced its revenue potential, reflecting a robust growth trajectory in its core business operations.

A Deep Dive into American Water Works Company, Inc. (AWK) Profitability

A Deep Dive into American Water Works Company, Inc.'s Profitability

Gross Profit Margin: For the nine months ended September 30, 2024, the gross profit was approximately $1,327 million, with total revenues of $2,733 million, resulting in a gross profit margin of 48.6%. For the same period in 2023, the gross profit margin was 48.9% on revenues of $2,489 million and gross profit of $1,217 million.

Operating Profit Margin: The operating income for the nine months ended September 30, 2024, was $626 million, yielding an operating profit margin of 22.9%. This compares to an operating income of $596 million and an operating margin of 23.9% for the nine months ended September 30, 2023.

Net Profit Margin: The net income attributable to common shareholders for the nine months ended September 30, 2024, was $812 million, leading to a net profit margin of 29.7%. For the same period in 2023, the net profit margin was 31.0% with net income of $773 million.

Trends in Profitability Over Time

The profitability metrics have shown slight fluctuations over the past year. The gross profit margin decreased from 48.9% in 2023 to 48.6% in 2024. The operating profit margin also saw a decline from 23.9% to 22.9%, while the net profit margin dropped from 31.0% to 29.7%.

Comparison of Profitability Ratios with Industry Averages

As of 2024, the average gross profit margin for the water utility industry is approximately 45%, placing the company above industry standards. The average operating profit margin in the industry is around 20%, again indicating that the company is performing relatively well. However, the net profit margin is slightly below the industry average of 30%.

Analysis of Operational Efficiency

The operational efficiency can be assessed through various metrics such as operating expenses and cost management. The total operation and maintenance expense for the nine months ended September 30, 2024, was $1,109 million, an increase from $1,043 million in 2023. Key components of operating expenses include:

The increase in operational expenses reflects higher production costs primarily due to increased purchased water costs and related usage, alongside rising employee-related costs that support business growth.

Debt vs. Equity: How American Water Works Company, Inc. (AWK) Finances Its Growth

Debt vs. Equity Structure

As of September 30, 2024, the company's total long-term debt amounted to $10.362 billion, with short-term commercial paper borrowings totaling $215 million. The overall debt-to-equity ratio is 0.56, indicating a balanced approach towards leveraging debt while maintaining equity.

The company has engaged in various debt instruments to finance its growth. Recent issuances include:

• On February 23, 2024, a $1.4 billion debt offering consisting of $700 million in senior notes due in 2034 and $700 million in senior notes due in 2054.
• On June 29, 2023, the issuance of $1.035 billion in exchangeable senior notes due 2026.

The weighted average interest rate on the outstanding long-term debt is approximately 4.20%, with maturity dates extending from 2024 to 2061. The average interest rate on short-term borrowings was about 4.90% as of September 30, 2024.

In terms of credit ratings, as of October 30, 2024, the company holds:

The company maintains a robust liquidity profile, with total available liquidity of $2.587 billion as of September 30, 2024, which includes cash and cash equivalents of $127 million and available capacity from credit facilities.

The balance between debt and equity funding is strategically managed. The company plans to fund future capital investments through a combination of operating cash flow, long-term debt, and equity issuances. For 2024, the anticipated capital investment is approximately $3.3 billion.

Assessing American Water Works Company, Inc. (AWK) Liquidity

Assessing American Water Works Company, Inc.'s Liquidity

Current Ratio: As of September 30, 2024, the current ratio was 1.13, indicating a healthy liquidity position, as current assets exceed current liabilities.

Quick Ratio: The quick ratio for the same period stood at 0.85, suggesting that while the company can cover its short-term liabilities with its most liquid assets, there is a slight reliance on inventory to maintain liquidity.

Analysis of Working Capital Trends

Working capital decreased by $20 million from Q3 2023 to Q3 2024, reflecting a tighter liquidity position despite a growth in current assets.

Cash Flow Statements Overview

For the nine months ended September 30, 2024, the cash flow statement reveals the following trends:

• Operating Cash Flow: Net cash provided by operating activities was $1,406 million, an increase from $1,347 million in the same period of 2023.
• Investing Cash Flow: Net cash used in investing activities totaled ($2,159 million), up from ($1,928 million) year-over-year.
• Financing Cash Flow: Net cash provided by financing activities was $566 million, down from $1,125 million in 2023.

The increase in operating cash flow is attributed to higher net income and improved non-cash activities. However, the rise in investing cash flow reflects increased capital expenditures, primarily for infrastructure improvements.

Potential Liquidity Concerns or Strengths

Despite strong operating cash flows, the company faces potential liquidity concerns due to significant cash outflows in investing activities. The reliance on long-term debt financing to fund capital investments may also pose risks if market conditions change.

Overall, the company's ability to manage its cash flows effectively and maintain a favorable current ratio supports its liquidity position, but careful monitoring is essential given the increasing capital expenditures.

As of September 30, 2024, the company had $177 million in cash and cash equivalents, down from $661 million in the prior year, indicating a need for prudent cash management strategies moving forward.

Is American Water Works Company, Inc. (AWK) Overvalued or Undervalued?

Valuation Analysis

The valuation of the company can be assessed through key financial ratios and stock performance metrics. Here’s a breakdown of the current valuation landscape as of 2024.

Price-to-Earnings (P/E) Ratio

The current P/E ratio stands at 27.2, reflecting an increase from 26.4 in the previous year. This indicates that investors are willing to pay $27.20 for every $1 of earnings.

Price-to-Book (P/B) Ratio

The P/B ratio is 3.5, suggesting that the stock is trading at 3.5 times its book value. This is up from a P/B ratio of 3.2 in 2023.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio is currently 15.8, compared to a ratio of 14.9 last year. This metric indicates the company’s valuation based on its earnings before interest, taxes, depreciation, and amortization.

Stock Price Trends

Over the last 12 months, the stock price has shown significant volatility. The stock opened at $120.50 and has reached a high of $135.00 and a low of $110.00. As of the latest trading day, the stock price is $130.00.

Dividend Yield and Payout Ratio

The current dividend yield is 2.4%, with a quarterly dividend of $0.7650 per share. The payout ratio stands at 60%, indicating the proportion of earnings paid out as dividends. This is a slight increase from a payout ratio of 58% last year.

Analyst Consensus

Analyst consensus on the stock valuation is bullish, with a majority rating it as a Buy. Specifically, 65% of analysts recommend a buy, while 30% suggest holding, and only 5% rate it as a sell.

Key Risks Facing American Water Works Company, Inc. (AWK)

Key Risks Facing American Water Works Company, Inc.

The financial health of American Water Works Company, Inc. is influenced by a variety of internal and external risk factors. Understanding these risks is crucial for investors looking to assess the company's stability and growth potential.

Overview of Internal and External Risks

American Water Works faces several internal and external risks that could impact its financial performance:

• Industry Competition: The utility sector is highly competitive, with numerous companies vying for market share. Increased competition can lead to pricing pressures and reduced margins.
• Regulatory Changes: The company operates in a heavily regulated environment. Changes in regulations can affect operational costs and capital expenditure requirements. For instance, new regulations around PFAS (per- and polyfluoroalkyl substances) compliance can increase costs significantly.
• Market Conditions: Economic downturns can affect consumer demand for water and wastewater services, impacting revenue growth.

Operational, Financial, or Strategic Risks

Recent earnings reports have highlighted several operational and financial risks:

• Increased Operating Costs: For the nine months ended September 30, 2024, total operation and maintenance expenses increased by $66 million compared to the same period in 2023, primarily due to higher production costs and employee-related expenses.
• Capital Investment Risks: The company plans to invest approximately $3.3 billion in infrastructure and acquisitions in 2024. While this is intended to drive growth, it also poses risks if projects do not yield expected returns.
• Debt Levels: As of September 30, 2024, the company had a debt-to-capitalization ratio of 0.56, indicating a significant reliance on debt financing. This could limit financial flexibility in adverse market conditions.

Mitigation Strategies

The company has implemented several strategies to mitigate identified risks:

• Regulatory Engagement: Active engagement with regulatory bodies to ensure compliance and influence favorable outcomes in rate cases. Recently approved rate increases in various states total $256 million.
• Cost Management Initiatives: Ongoing efforts to control operational costs through efficiency improvements and strategic sourcing of materials and services.
• Diversification of Services: Expanding service offerings through acquisitions and organic growth to reduce dependency on any single revenue source.

Risk Factor Summary Table

These risk factors are critical for investors to consider when evaluating the financial health and future prospects of American Water Works Company, Inc.

Future Growth Prospects for American Water Works Company, Inc. (AWK)

Growth Opportunities

The company is strategically positioned for growth through a combination of infrastructure investments, acquisitions, and organic expansion. Key growth drivers include:

1. Capital Investment in Infrastructure

The company plans to invest approximately $3.3 billion in growth strategies in 2024. This includes:

• $1.9 billion for infrastructure improvements and replacements.
• $119 million to fund acquisitions, adding approximately 33,400 customers.
• Organic growth through the addition of 14,700 new customers in existing systems.

2. Revenue Growth Projections

For the three and nine months ended September 30, 2024, operating revenues increased by $124 million and $244 million, respectively. The breakdown of revenue sources includes:

3. Strategic Acquisitions

Recent acquisitions include:

• Acquisition of a wastewater treatment plant for $86 million, adding approximately 26,000 customers.
• Acquisition of wastewater system assets from the Butler Area Sewer Authority for $230 million, servicing approximately 15,000 customer connections.
• Pending agreements to acquire approximately 43,400 additional customers for a total aggregate purchase price of $169 million.

4. Regulatory Support and Rate Increases

Recent regulatory approvals have facilitated revenue growth through rate increases. For instance:

• In Pennsylvania, an annualized increase of $99 million was approved based on an authorized return on equity of 9.45%.
• In Indiana, an annualized increase of $66 million was approved, with multiple step increases planned through 2025.

5. Competitive Advantages

The company benefits from several competitive advantages that position it favorably for future growth:

• Geographic diversity across multiple states, enhancing customer base stability.
• Established relationships with regulatory bodies, facilitating smoother rate approvals.
• Strong demand for water and wastewater services, with an increase in operating revenues driven by both organic growth and acquisitions.

Article updated on 8 Nov 2024

Resources:

• American Water Works Company, Inc. (AWK) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of American Water Works Company, Inc. (AWK)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View American Water Works Company, Inc. (AWK)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.