Opinions
James Thorne
American Water Works Co. Inc.
AWK-N
COMMENT
Jun 16, 2016
Stock price when the opinion was issued
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Seasonally, water stocks tend to do well in the summer. This one has had a phenomenal run for the last year, all the way from $50 to about $84 recently, and is now starting to pull back. It had become overbought. Investors are taking profits, and rotating into other areas. He would stay away.
This company purchases the water infrastructure of cities in the US, upgraded, fixes it, and then basically sells the services back to the city. A very interesting business model, in that Donald Trump is going to want to rebuild the inner cities in the US. He likes the concept, but this is way too expensive for him. The dividend yield is not high enough and it is expensive.
Utilities have been fantastic. You get that bond proxy. Rates have been okay. Among that group, water has been great. He likes the water and utility themes. He would have preferred an ETF rather than one stock in the space. The catch here is valuation. It is an 8-9% grower at a 20+ times earnings. H does not see a huge risk unless rates go through the roof.
This company buys the water pipes from US municipalities. It fixes the pipes and they get a fee for moving the water for the communities. A very, very stable business. The problem is, they have very little growth and they have no pricing power. PE is 30X and the yield is less than 2%, so he can’t get his head around the valuation.