Did this utility stock meet expectations in the first quarter?

We recently compiled a list of 10 Best Utility Stocks to Buy Now. In this article, we’ll take a look at where American Water Works Company, Inc. (NYSE: AWK) ranks in relation to other utility stocks. You can also check out the 20 states with the most expensive electricity in the US here.

The power and utilities sector saw mixed results in 2023. Despite a 53% year-over-year drop in natural gas prices for power generation, customer bills increased 1.9%. . The increase is driven by record investments of nearly $171 billion in grid modernization and decarbonization efforts, as well as rising interest rates. Overall, electricity sales decreased slightly by 1.2% year-on-year (yoy).

By 2024, the outlook for clean energy is promising. Forecasts call for stable electricity prices and sales growth of 2%. This growth is fueled by increased investment in clean energy, both from utility companies and the government. Investments are geared towards renewable energy production, with solar capacity expected to double in 2024.

The U.S. Energy Information Administration (EIA) is forecasting a big year for solar power, with utilities planning a 30% increase in capacity by adding 31 gigawatts. Wind power is also expected to grow by 5%, or 7 gigawatts. As a result, solar and wind are poised to become the primary sources of electricity generation in the United States, potentially overtaking coal. Renewable energy is expected to reach 18% of total generation, while coal could fall to 17%, marking a historic step in the transition to cleaner energy sources.

Additionally, electricity demand in the United States is expected to accelerate in the coming years. According to a report from consultancy Grid Strategies, electricity demand forecasts for 2024 have been revised significantly upward based on filings submitted to the Federal Energy Regulatory Commission (FERC) in 2023. Grid planners are now forecasting a national increase of 4.7% over the next five years. years, which represents a sharp increase from the 2.6% growth projected last year. This increase in demand is expected to be accompanied by a substantial increase in peak demand, with forecasts indicating growth of 38 gigawatts (GW) over the next five years.

This increase in electricity demand is due to several factors. Industrial facilities, manufacturing plants, and data centers are experiencing a construction boom, with data centers in some regions like Virginia experiencing unprecedented growth of 6-8% each year. Electric vehicles are also expected to contribute to increased demand, as BloombergNEF (BNEF) forecasts a 20% year-over-year increase in global sales of battery electric and plug-in hybrid vehicles in 2024.

On the supply side, challenges remain. Utilities will prioritize grid reliability and resiliency in response to climate change, according to Danny Freeman, senior associate for energy and utilities at West Monroe. Extreme heat and drought will likely continue to disrupt power generation in 2024, with the record heat of summer 2023 likely marking the start of a long-term trend.

The American West is facing its driest period in 1,200 years, and researchers predict long-term aridification. These conditions can significantly reduce energy production, particularly during peak periods. Thus, the Department of Energy (DOE) allocated $3.5 billion in October 2023 for projects that will improve the flexibility and resilience of the grid. Funding for this project is provided by the Grid Resilience Program (GRIP), created by the Infrastructure Investment Jobs Act (IIJA).

The rapid transformation of the utility sector presents many attractive opportunities for investors. With this in mind, let’s take a look at the 10 best utility stocks to buy now.

Our methodology

To shortlist the best utility stocks, we relied on Insider Monkey’s database of 920 hedge funds as of Q1 2024 to analyze hedge fund sentiment for each stock. We selected the utility stocks with the largest number of hedge fund investors. Why are we interested in stocks that hedge funds are piling into? The reason is simple: our research has shown that we can outperform the market by imitating the stocks selected by the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A technician at a deep water treatment facility, ensuring clean water for public safety.

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

Number of hedge fund holders: 36

American Water Works Company, Inc. (NYSE: AWK) is a leading American water utility company. Founded in 1886 and headquartered in Camden, New Jersey, this company provides water and wastewater services to millions of residents in 14 states.

The company reported strong first-quarter earnings of $0.95 per share, up from $0.91 in 2023, meeting expectations. American Water Works Company, Inc. (NYSE: AWK) also reaffirmed its full-year EPS guidance of $5.20 to $5.30 per share. American Water Works is progressing well with its $3.1 billion capital investment plan and recently completed the acquisition of a wastewater treatment plant in Granite City, Illinois, for $86 million .

Analysts are moderately bullish on American Water Company, Inc. (NYSE:AWK) with a “moderate buy” rating. The average price target for the next 12 months is $134.20, suggesting a potential upside of 2.8%.

Here’s what ClearBridge Investments said about American Water Works Company, Inc. (NYSE:AWK) in its Q3 2023 Investor Letter:

“At the same time, a disadvantaged utility sector has allowed us to be opportunistic. During the quarter, we added American Water Works Company, Inc. (NYSE: AWK), the largest publicly traded water utility in the United States, operating in 24 states and providing drinking water, wastewater treatment and other related services to 14 million of customers. Continued investments in infrastructure improvements, resilience and water quality are expected to drive solid growth and generate attractive regulated returns for the company for the foreseeable future. Additionally, the water infrastructure market remains highly fragmented, with 80% of community water systems serving populations of 3,000 or fewer, allowing American Water Works to pursue its strategy of accretive acquisitions to support its growth rate.

Global AWK ranks 8th on our list of the best utility stocks to buy. You can visit 10 Best Utility Stocks to Buy Now to see other utility stocks that are on hedge funds’ radar. While we recognize the potential of AWK as an investment, our belief lies in the belief that AI stocks hold more promise in terms of higher returns in a shorter time frame. If you’re looking for an AI stock that’s more promising than AWK but is trading at less than 5x earnings, check out our report on cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.