Janney Upgrades American Water Works After Pivotal Acquisition: 'The Upside Potential Outweighs Downside Risk'

American Water Works Company Inc AWK announced April 11 an agreement to acquire Pivotal Home Solutions, a unit of Southern Co SO, for $365 million in cash.

Since the announcement, the stock has shed over 1 percent, while it also trading well off its high for the year.

The Analyst

Janney analyst Michael Gaugler upgraded American Water Works from Neutral to Buy and increased the price target from $87 to $92.

The Thesis

American Water Works' Pivotal acquisition is timed to perfection, Gaugler said: Pivotal can provide additional cash flow at a juncture when utility dividends are likely to turn unattractive vis-à-vis T-note yields amid a rising rate environment.

A purchase agreement the company recently signed for wastewater operations for the city of Alton, Illinois, offers a significant "head start" toward acquisition goals for 2019.

American Water Works now expects its earnings per share to be in the top-half of its 7-10 percent guidance range through 2022, the analyst said. 

"Our view is that with more than 10-percent upside to our fair value, we're taking an opportunistic approach and upgrading our rating from Neutral to Buy, as we now believe the upside potential outweighs downside risk," Gaugler said. 

The Price Action

American Water Works shares have shed over 11 percent year-to-date.

The stock was up 1.67 percent at the time of publication Monday.

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