Intrinsic value of American States Water - AWR

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$44.52

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$44.52

 
Intrinsic value

$20.57

 
Up/down potential

-54%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of AWR stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -5.01
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  339
  445
  455
  467
  480
  494
  510
  528
  546
  567
  588
  612
  637
  663
  691
  721
  753
  786
  821
  859
  898
  940
  984
  1,030
  1,079
  1,130
  1,184
  1,241
  1,301
  1,364
  1,430
Variable operating expenses, $m
 
  330
  337
  346
  355
  366
  378
  391
  405
  420
  436
  453
  472
  491
  512
  534
  557
  582
  608
  636
  665
  696
  729
  763
  799
  837
  877
  919
  964
  1,010
  1,059
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  321
  330
  337
  346
  355
  366
  378
  391
  405
  420
  436
  453
  472
  491
  512
  534
  557
  582
  608
  636
  665
  696
  729
  763
  799
  837
  877
  919
  964
  1,010
  1,059
Operating income, $m
  115
  115
  118
  121
  124
  128
  132
  137
  142
  147
  152
  159
  165
  172
  179
  187
  195
  204
  213
  223
  233
  244
  255
  267
  280
  293
  307
  322
  337
  354
  371
EBITDA, $m
  154
  122
  124
  128
  131
  135
  140
  144
  150
  155
  161
  167
  174
  181
  189
  197
  206
  215
  225
  235
  246
  257
  269
  282
  295
  309
  324
  340
  356
  373
  391
Interest expense (income), $m
  22
  24
  25
  26
  28
  29
  31
  33
  36
  38
  41
  44
  47
  50
  53
  57
  61
  65
  69
  74
  79
  84
  89
  95
  101
  107
  114
  121
  128
  136
  144
Earnings before tax, $m
  94
  91
  93
  95
  97
  99
  101
  103
  106
  109
  112
  115
  118
  122
  126
  130
  134
  139
  144
  149
  154
  160
  166
  172
  179
  186
  193
  201
  209
  218
  227
Tax expense, $m
  34
  25
  25
  26
  26
  27
  27
  28
  29
  29
  30
  31
  32
  33
  34
  35
  36
  38
  39
  40
  42
  43
  45
  46
  48
  50
  52
  54
  56
  59
  61
Net income, $m
  60
  67
  68
  69
  70
  72
  74
  75
  77
  79
  82
  84
  86
  89
  92
  95
  98
  101
  105
  109
  113
  117
  121
  126
  131
  136
  141
  147
  153
  159
  165

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,470
  1,497
  1,532
  1,571
  1,615
  1,664
  1,718
  1,777
  1,840
  1,908
  1,981
  2,060
  2,143
  2,232
  2,327
  2,427
  2,534
  2,646
  2,765
  2,891
  3,024
  3,164
  3,312
  3,468
  3,632
  3,805
  3,987
  4,179
  4,380
  4,592
  4,815
Adjusted assets (=assets-cash), $m
  1,470
  1,497
  1,532
  1,571
  1,615
  1,664
  1,718
  1,777
  1,840
  1,908
  1,981
  2,060
  2,143
  2,232
  2,327
  2,427
  2,534
  2,646
  2,765
  2,891
  3,024
  3,164
  3,312
  3,468
  3,632
  3,805
  3,987
  4,179
  4,380
  4,592
  4,815
Revenue / Adjusted assets
  0.231
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
  0.297
Average production assets, $m
  32
  32
  33
  34
  35
  36
  37
  38
  39
  41
  42
  44
  46
  48
  50
  52
  54
  57
  59
  62
  65
  68
  71
  74
  78
  81
  85
  89
  94
  98
  103
Working capital, $m
  -11
  80
  82
  84
  87
  89
  92
  96
  99
  103
  107
  111
  115
  120
  125
  130
  136
  142
  149
  155
  163
  170
  178
  186
  195
  205
  214
  225
  235
  247
  259
Total debt, $m
  411
  429
  452
  478
  508
  540
  576
  615
  657
  702
  751
  803
  858
  917
  980
  1,047
  1,117
  1,192
  1,271
  1,355
  1,443
  1,536
  1,634
  1,738
  1,847
  1,961
  2,082
  2,210
  2,343
  2,484
  2,632
Total liabilities, $m
  976
  994
  1,017
  1,043
  1,073
  1,105
  1,141
  1,180
  1,222
  1,267
  1,316
  1,368
  1,423
  1,482
  1,545
  1,612
  1,682
  1,757
  1,836
  1,920
  2,008
  2,101
  2,199
  2,303
  2,412
  2,526
  2,647
  2,775
  2,908
  3,049
  3,197
Total equity, $m
  494
  503
  515
  528
  543
  559
  577
  597
  618
  641
  666
  692
  720
  750
  782
  816
  851
  889
  929
  971
  1,016
  1,063
  1,113
  1,165
  1,220
  1,278
  1,340
  1,404
  1,472
  1,543
  1,618
Total liabilities and equity, $m
  1,470
  1,497
  1,532
  1,571
  1,616
  1,664
  1,718
  1,777
  1,840
  1,908
  1,982
  2,060
  2,143
  2,232
  2,327
  2,428
  2,533
  2,646
  2,765
  2,891
  3,024
  3,164
  3,312
  3,468
  3,632
  3,804
  3,987
  4,179
  4,380
  4,592
  4,815
Debt-to-equity ratio
  0.832
  0.850
  0.880
  0.910
  0.940
  0.970
  1.000
  1.030
  1.060
  1.090
  1.130
  1.160
  1.190
  1.220
  1.250
  1.280
  1.310
  1.340
  1.370
  1.390
  1.420
  1.440
  1.470
  1.490
  1.510
  1.530
  1.550
  1.570
  1.590
  1.610
  1.630
Adjusted equity ratio
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336
  0.336

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  60
  67
  68
  69
  70
  72
  74
  75
  77
  79
  82
  84
  86
  89
  92
  95
  98
  101
  105
  109
  113
  117
  121
  126
  131
  136
  141
  147
  153
  159
  165
Depreciation, amort., depletion, $m
  39
  7
  7
  7
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
Funds from operations, $m
  65
  73
  74
  76
  77
  79
  81
  83
  85
  88
  90
  93
  96
  99
  102
  105
  109
  113
  117
  121
  126
  130
  135
  141
  146
  152
  158
  165
  171
  179
  186
Change in working capital, $m
  -32
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
Cash from operations, $m
  97
  103
  73
  74
  75
  77
  78
  80
  82
  84
  86
  89
  91
  94
  97
  100
  103
  107
  110
  114
  118
  123
  127
  132
  137
  143
  148
  154
  161
  167
  174
Maintenance CAPEX, $m
  0
  -6
  -6
  -7
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
New CAPEX, $m
  -130
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
Cash from investing activities, $m
  -131
  -7
  -7
  -8
  -8
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -17
  -19
  -20
  -20
  -21
  -22
  -24
  -25
Free cash flow, $m
  -34
  96
  66
  66
  67
  69
  70
  71
  73
  75
  76
  78
  81
  83
  85
  88
  91
  93
  97
  100
  103
  107
  111
  115
  119
  123
  128
  133
  138
  144
  150
Issuance/(repayment) of debt, $m
  62
  18
  23
  26
  29
  33
  36
  39
  42
  45
  49
  52
  56
  59
  63
  67
  71
  75
  79
  84
  88
  93
  98
  103
  109
  115
  121
  127
  134
  141
  148
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  63
  18
  23
  26
  29
  33
  36
  39
  42
  45
  49
  52
  56
  59
  63
  67
  71
  75
  79
  84
  88
  93
  98
  103
  109
  115
  121
  127
  134
  141
  148
Total cash flow (excl. dividends), $m
  29
  115
  88
  93
  97
  101
  106
  110
  115
  120
  125
  130
  136
  142
  148
  154
  161
  168
  176
  183
  191
  200
  209
  218
  228
  238
  249
  260
  272
  285
  298
Retained Cash Flow (-), $m
  -28
  -9
  -12
  -13
  -15
  -16
  -18
  -20
  -21
  -23
  -25
  -26
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -42
  -45
  -47
  -50
  -52
  -55
  -58
  -61
  -64
  -68
  -71
  -75
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  105
  77
  79
  82
  85
  88
  91
  94
  97
  100
  104
  108
  112
  116
  121
  125
  130
  136
  141
  147
  153
  159
  166
  173
  180
  188
  196
  204
  213
  223
Discount rate, %
 
  6.80
  7.14
  7.50
  7.87
  8.27
  8.68
  9.11
  9.57
  10.05
  10.55
  11.08
  11.63
  12.21
  12.82
  13.46
  14.14
  14.84
  15.59
  16.37
  17.18
  18.04
  18.94
  19.89
  20.89
  21.93
  23.03
  24.18
  25.39
  26.66
  27.99
PV of cash for distribution, $m
 
  99
  67
  64
  61
  57
  53
  49
  45
  41
  37
  33
  29
  25
  21
  18
  15
  12
  10
  8
  6
  5
  4
  3
  2
  1
  1
  1
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

American States Water Company, through its subsidiaries, provides water and electric services to residential, industrial, and other customers in the United States. It operates through three segments: Water, Electric, and Contracted Services. The company purchases, produces, distributes, and sells water, as well as distributes electricity. As of February 23, 2017, it served approximately 261,000 water customers located throughout 10 counties in Northern, Coastal, and Southern California; and approximately 24,000 electric customers located in the City of Big Bear and surrounding areas in San Bernardino County, California. The company also provides water and/or wastewater services, including the operation, maintenance, renewal, and replacement of the water and/or wastewater systems at various military installations. American States Water Company was founded in 1929 and is based in San Dimas, California.

FINANCIAL RATIOS  of  American States Water (AWR)

Valuation Ratios
P/E Ratio 27.1
Price to Sales 3.7
Price to Book 3.3
Price to Tangible Book
Price to Cash Flow 16.8
Price to Free Cash Flow -49.3
Growth Rates
Sales Growth Rate -5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 49.4%
Cap. Spend. - 3 Yr. Gr. Rate 6%
Financial Strength
Quick Ratio 0
Current Ratio 0.4
LT Debt to Equity 65%
Total Debt to Equity 83.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 5.3%
Ret/ On Assets - 3 Yr. Avg. 4.7%
Return On Total Capital 7%
Ret/ On T. Cap. - 3 Yr. Avg. 7.2%
Return On Equity 12.5%
Return On Equity - 3 Yr. Avg. 12.3%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 35.6%
EBITDA Margin - 3 Yr. Avg. 32.2%
Operating Margin 26.4%
Oper. Margin - 3 Yr. Avg. 25.9%
Pre-Tax Margin 21.6%
Pre-Tax Margin - 3 Yr. Avg. 21.4%
Net Profit Margin 13.8%
Net Profit Margin - 3 Yr. Avg. 13.3%
Effective Tax Rate 36.2%
Eff/ Tax Rate - 3 Yr. Avg. 37.8%
Payout Ratio 55%

AWR stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AWR stock intrinsic value calculation we used $436 million for the last fiscal year's total revenue generated by American States Water. The default revenue input number comes from 2016 income statement of American States Water. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AWR stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.8%, whose default value for AWR is calculated based on our internal credit rating of American States Water, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of American States Water.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AWR stock the variable cost ratio is equal to 74.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AWR stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.8% for American States Water.

Corporate tax rate of 27% is the nominal tax rate for American States Water. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AWR stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AWR are equal to 7.2%.

Life of production assets of 0.8 years is the average useful life of capital assets used in American States Water operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AWR is equal to 18.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $494 million for American States Water - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 37.246 million for American States Water is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of American States Water at the current share price and the inputted number of shares is $1.7 billion.


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COMPANY NEWS

▶ American States Water meets 4Q profit forecasts   [Feb-23-17 07:35PM  Associated Press]
▶ Better Buy: Aqua America vs. American States Water   [Feb-18-17 09:55PM  at Motley Fool]
▶ Top Water Stocks to Buy in 2017 -- and the Ones to Avoid   [Jan-27-17 06:27PM  at Motley Fool]
▶ 5 Solid Dividend Stocks Poised to Grow in 2017   [Jan-10-17 08:32AM  at Motley Fool]
▶ Is American States Water Co (AWR) A Good Stock To Buy?   [Dec-13-16 05:14AM  at Insider Monkey]
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▶ Five Water Stocks That Hedge Funds Like   [Sep-12-16 12:44PM  at Insider Monkey]
▶ How Sustainable Is American Water Works' Dividend?   [Sep-08-16 09:38AM  at Motley Fool]
▶ Five Water Stocks Hedge Funds Are Betting On   [Aug-12-16 11:18AM  at Insider Monkey]
▶ Why Wall Street Is Wrong About American Water Works   [Jul-14-16 02:15PM  at Motley Fool]
Stock chart of AWR Financial statements of AWR
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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