James O. Lykins
J.J.B. Hilliard, W.L. Lyons, LLC
502-588-1799
[email protected]
American Water Works (AWK) reported Q4'10 EPS of $0.23 versus $0.21, matching our estimate and a penny below the consensus (the company pre-announced Q4 results at its analyst day on 2/15). Revenue rose 11.1% to $664.5 million.
Regulated Business revenues rose 10.4% or $55.4 million, driven mostly by the impact of rate awards from infrastructure investment and increased water sales. Market-Based Operations (formerly Non-Regulated Businesses) revenues increased 15.6% or $11.0 million, mostly attributed to higher revenues from Contract Operations, specifically from industrial and military contracts. Military bases are becoming an increasingly large portion of contract operations with good margin potential, and about 50 bases are likely to be put up for privatization over the next five years.
Management maintained recently announced EPS guidance of $1.65-$1.75. We are making no change to our FY'11 (fiscal year 2011) EPS estimate of $1.71 and inaugurating a FY'12 EPS estimate of $1.85. We derive our $31 price target using a multiple of 18x our FY'11 EPS estimate, which in our view is justified given the company's growth prospects and historical trading range. The stock is trading at just 16.2x our FY'11 EPS estimate and 15.0x our FY'12 EPS estimate, in our view very compelling multiples.
Aqua America (WTR) reported Q4 EPS of $0.21 versus $0.20 in the year ago period, matching our and the consensus estimate. Revenue rose 6.8% to $179.3 million. Operations & Maintenance expenses rose 6.1% to $70.1 million, but as a percentage of revenue improved 20 basis points to 39.1% despite twice the normal number of main breaks (185) in December in southeastern Pennsylvania. However, O&M improvement in FY'11 is expected to be about 25 basis points (bps) on the heels of 170 bps (basis points) of year-over-year (y/y) improvement in FY'10.
We are raising our price target by $2 to $25, which we derive by applying a multiple of 24x to our 2012 earnings estimate, which is at the low end of multiples where the company typically trades. The stock is currently trading at 23.3x and 21.7x our 2010 and 2011 EPS estimates, respectively.
We also note the company raised its dividend this past December, its 20th increase in the past 19 years. Including the 2.8% yield, we believe total return potential is approximately 15%.
