American Water Works No Longer A Buy, Janney's Gaugler Cuts On 'Concern' With Valuation

Janney Montgomery Scott's Michael Gaugler downgraded the rating on American Water Works Company Inc (NYSE: AWK) from Buy to Neutral, given that the stock is now trading above the fair value estimate of $66.

"The shares have performed well in recent years, riding a wave of higher earnings, expanding P/E multiples, and a tailwind from decreasing 10 Year T-Note yields," Gaugler said.

Although earnings growth is expected to continue, the analyst believes that the current valuation is appropriate.

Gaugler explained that utility companies have benefited from the demand for quality and safety in the current market environment, with the P/E ratios for several stocks having set new record highs.

"With 4 U.S. states already in recession, according to indexes of state economic performance tracked by Moody's analytics, and potentially more on the way, the concerns are warranted," Gaugler said, while adding, "Further adding to investor concerns have been steadily lower interest rates, particularly on the U.S. 10 Year Note."

American Water Works is currently trading in line with or above its water utility peers, and the analyst believes that there is limited potential for further multiple expansion, unless the 10 Year T-Note yield declines meaningfully.

The company reported its 4Q15 results in line with expectations, with the EPS in line with the consensus but marginally below the estimate.

American Water Works maintained its 2016 guidance, with EPS from continuing operations guided to $2.75-$2.85.