On Monday, Jefferies initiated coverage on shares of American Water (NYSE: NYSE:AWK) with a rating of Underperform and set a price target of $124.00. The firm expressed concerns over the company's earnings per share (EPS) growth and balance sheet pressures.
Jefferies pointed out several challenges facing American Water, including difficulties in offsetting approximately $80 million in interest income post-2026, hurdles in continuing its acquisition-driven growth strategy, and increasing regulatory uncertainties.
The firm's analysis suggests that American Water's stock is currently valued at a premium of over 45% compared to its electric utility peers, a valuation Jefferies finds hard to justify given the company's growth and financial headwinds. The mention of a "lack of data center thematic" refers to the absence of a growth catalyst that data center expansion has provided to some other utility companies.
Jefferies highlighted the potential impact of a recent regulatory setback in Pennsylvania as an additional risk factor for the company. This setback could signal rising regulatory challenges that may affect future performance. The firm's underperform rating indicates an expectation that American Water's stock will lag behind the broader market or its industry peers.
The stock price target of $124.00 suggests a total shareholder return (TSR) that is negative by approximately 12%, based on the stock's recent performance. This target reflects the firm's assessment of the risks and headwinds that could potentially depress the stock's value.
Jefferies' coverage initiation on American Water comes as the utility sector faces a changing landscape, with companies navigating through various financial and regulatory environments.
InvestingPro Insights
Adding to Jefferies' analysis, recent data from InvestingPro provides additional context to American Water's financial situation. The company's P/E ratio stands at 29.14, which aligns with Jefferies' observation of a premium valuation compared to peers. This high valuation is further emphasized by an InvestingPro Tip noting that AWK is "Trading at a high P/E ratio relative to near-term earnings growth."
Despite the challenges highlighted by Jefferies, AWK has demonstrated some positive financial metrics. The company's revenue grew by 7.68% over the last twelve months, with a robust gross profit margin of 59.83%. Moreover, an InvestingPro Tip reveals that AWK "Has raised its dividend for 10 consecutive years," which may appeal to income-focused investors.
However, it is worth noting that AWK's dividend yield is currently 2.15%, which may not fully compensate for the risks outlined in Jefferies' report. Investors considering AWK should weigh these factors carefully. For a more comprehensive analysis, InvestingPro offers 7 additional tips that could provide further insights into AWK's investment potential.
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