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Monday, BofA Securities analysts adjusted their stance on American States Water (NYSE:AWR), downgrading the stock from Neutral to Underperform and reducing the price target to $71 from the previous $85. The adjustment reflects concerns over the company’s stock trading at a significant premium compared to its peers within the water utility sector. Currently trading at a P/E ratio of 25x and price-to-book of 3.2x, InvestingPro analysis indicates the stock is fairly valued relative to its Fair Value estimate.
The analysts noted that American States Water’s premium is substantial, standing at 32% over their coverage group average and 11% higher than the water utility subgroup. While acknowledging the company as one of the best-managed water utilities, with an impressive track record of raising dividends for 32 consecutive years and a current dividend yield of 2.5%, the analysts believe that the stock’s high valuation may not be sustainable in the current environment. They see no fundamental issues with the company’s earnings quality or growth prospects, supported by InvestingPro’s Financial Health Score of 2.27 (Fair), but suggest that the market might not support the continued premium valuation.
The new price target of $71 is based on a consistent 5% premium to the average projected 2026 water utility multiple, reflecting American States Water’s quality. However, the analysts anticipate a potential compression in multiples, particularly in a market scenario characterized by rising interest rates, which could dampen the appetite for stocks with high growth premiums.
The downgrade and price target adjustment by BofA Securities come amid a broader market reassessment of utility stocks, which are often sensitive to changes in interest rate expectations. The analysts’ commentary emphasizes a cautious approach to high premium utilities in the face of shifting market dynamics.
American States Water has not yet issued any public statement in response to the downgrade and revised price target. The company’s stock performance following this announcement will be closely watched by investors as they assess the impact of BofA Securities’ updated outlook.
In other recent news, American States Water Company has been making headlines with its strong financial performance and regulatory settlements. The company reported an increase in earnings per share (EPS) to $0.95 in the third quarter of 2024, up from $0.85 in the same quarter the previous year. This growth was primarily driven by rate increases in the Water segment and investment gains, despite rising operating expenses and interest costs.
Significant investments in infrastructure and new construction projects have also been reported, with capital expenditures projected to be between $210 million and $230 million for the full year. Furthermore, Golden State Water’s settlement with the California Public Utilities Commission authorizes $573.1 million in capital investments for 2025-2027, while Bear Valley Electric’s settlement proposes $75.6 million in capital investments for 2023-2026.
In addition to these developments, BofA Securities initiated coverage of American States Water with a Neutral rating and a price target of $85.00. The firm’s analyst acknowledged the company’s strong balance sheet, high-quality utility profile, and history of delivering returns that exceed the regulated average return on equity (ROE). However, the firm noted that the company’s shares might be fully valued at the moment, considering its premium positioning in the market relative to its peers.
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