Why American Water Works May Not Want a Fed Pivot

American Water Works Company (NYSE: AWK) stock is up 0.65% after beating the top and bottom lines in its third-quarter earnings report that it delivered on November 1, 2022. The water utility company delivered top-line revenue of $1.08 billion which beat expectations for $1.07 billion. And on the bottom line, the beat was even stronger. The company posted $1.63 earnings per share (EPS), which was 7% above the forecast for $1.51 EPS.  

With news like that, and because it’s a utility stock, it would be reasonable to think that AWK stock would be up for the year. But it’s not. In fact, the stock is down about 22% for the year. And one reason may be that investors consider the stock to be overvalued. And that’s why investors may want to wait for the Federal Reserve’s decision before buying or selling AWK stock. 

A Steady Source of Revenue and Earnings 

American Water Works and its subsidiary companies supply water and wastewater services to approximately 3.4 million business and residential customers. These customers are spread throughout 1,700 communities in 14 states in the United States including California.  

This allows the company to deliver a consistent stream of revenue. After all, water usage tends to remain constant. On a year-over-year basis, revenue is down by about 3%. It’s also important to point out that this quarter broke a string of seven quarters in which the company’s revenue came in lower than expectations.  

However, earnings are up. And the company affirmed its full-year earnings guidance. American Water Works is forecasting earnings per share of $4.39 to $4.49. The lower end of that range would be a year-over-year increase of about 3%. Plus, the company is guiding for high single-digit earnings growth in 2023 with a range of $4.72 to $4.82. 

The company does plan to spend between $30 and $34 billion on capex through 2031. That’s about 120% of its current market capitalization and the company plans to continue acquiring smaller utilities as part of its growth plan.  

A Risk-On Asset in the Utility Sector 

Let’s be clear. American Water Works is not a risk-on stock. However, the company has increased its adjusted earnings per share at an average annual rate of 8.6% over the last decade. That puts it at the high end of the utility sector.  

And not long ago, AWK had a price-to-earnings (P/E) ratio of over 34x. That put it right around the sector average of 36x. At a time when many investors value safety more than anything else, metrics like a P/E ratio (which isn’t always the best indicator) can take on outsized significance. However, MarketBeat shows the stock with a much more favorable P/E ratio of around 20x. 

But investors are still cautious of any stock that looks overvalued. This is where the Fed may come in. If the Federal Reserve shows any sign that it may be slowing the pace of interest rates, it’s likely to change investors’ appetite for risk. And that could be favorable for AWK stock.  

On the other hand, if the Fed continues to be hawkish, the price chart for American Water Works would suggest that investors may want to see a clear sign that the company will hit its earnings target before jumping in on a stock that is up 60% in the last five years.