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Is American Water Works Company Inc (AWK) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does American Water Works Company Inc (NYSE:AWK) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

American Water Works Co., Inc. (NYSE:AWK)

What we’re looking for
The graphs you’re about to see tell American Water Works Company Inc (NYSE:AWK)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at American Water Works Company Inc (NYSE:AWK)’s key statistics:

AWK Total Return Price Chart

AWK Total Return Price data by YCharts

Passing Criteria Three-Year* Change Grade
Revenue growth > 30% 17.8% Fail
Improving profit margin 50.7% Pass
Free cash flow growth > Net income growth 93.9% vs. 77.4% Pass
Improving EPS 67.3% Pass
Stock growth + 15% < EPS growth 116.7% vs. 67.3% Fail

Source: YCharts. * Period begins at end of Q1 2010.

AWK Return on Equity Chart

AWK Return on Equity data by YCharts

Passing Criteria Three-Year* Change Grade
Improving return on equity 58.1% Pass
Declining debt to equity (8.3%) Pass
Dividend growth > 25% 33.3% Pass
Free cash flow payout ratio < 50% Negative FCF Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we’re going
American Water Works Company Inc (NYSE:AWK) flows toward a respectable performance, with six of nine possible passing grades. However, despite coming through on free cash flow growth, it should be noted that the company is currently in the red on that metric — just closer to green than it was three years ago. Can American Water Works Company Inc (NYSE:AWK) turn off the leaky cash faucet, or will it be forced to call the plumber to patch up its holes with more debt? Let’s dig a little deeper to find out.

According to the National Association of Water Companies and the U.S. Chamber of Commerce, the nation’s water and waste-water infrastructure is in desperate need of repair and replacement, with more than seven billion gallons of treated drinking water lost to leaks in utility pipes every day across the United States. As of 2010, 45% of all pipes were in poor shape, and millions homeowners’ pipes are also experiencing leaks and breaks due to a number of factors. Over the next 20 years, the water and water-waste utility market will require a massive $650 billion investment in infrastructure repairs. That’s likely to keep American Water Works Company Inc (NYSE:AWK)’s free cash flow depressed for some time.

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