Morningstar | American Water Works Posts Strong Growth at Market-Based Segment
We are increasing our fair value estimate for American Water Works to $83 from $82 per share after the company reported strong 2018 third-quarter earnings driven by exceptional growth at its market-based segment. Adjusted EPS for the recently ended quarter was $1.20 versus $1.08 in the same period last year with the unregulated segment contributing an incremental $0.05 per share, or 71%, over the same period last year.American Water narrowed its 2018 adjusted EPS guidance to $3.27-$3.32, the top end of its initial 2018 guidance of $3.22-$3.32. Based on the higher guidance and strong year-to-date performance, with adjusted EPS up 11.5%, we have increased our 2018 EPS estimate by $0.03 share, to $3.30 per share. We now assume the market-based segment contributes $0.31, up from $0.27 per share, partially offset by a $0.01 reduction in the regulated segment. Regulated rate base appears to be growing slightly less than our projection.
American Water has taken action to address issues at Keystone, its market-based business primarily focused on providing water services to energy exploration and production companies operating in the Appalachian Basin. The water trucking and construction services businesses have been discontinued, and the company will only focus on the water transfer business going forward. American Water took a $0.22 impairment charge in the quarter.
Problems at Keystone didn’t diminish the very strong performance at homeowner services and military services. American Water was recently awarded a 50-year, $591 million contract to provide water and other services to Fort Leonard Wood in Missouri. This is the 14th military base served by American Water.
We have accelerated our annual earnings growth assumption for the market-based segment to 15.8% from 13% over the next five years, pushing our consolidated EPS growth assumption to 8.7% from 8.5%. Our EPS growth assumption is now slightly higher than the midpoint of management's 7%-10% guidance.
American Water Works is a holding company. Through its subsidiaries, the company is a publicly-traded water and wastewater utility company. The company provides drinking water, wastewater and other related services to people in various states. The company's Regulated Businesses provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers. The company's Market-Based Businesses provide complementary home services primarily to residential and smaller commercial customers and water and wastewater services to the United States government on military installations, as well as municipalities, utilities and industrial customers.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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