American States Water Faces High Valuation Risks, BofA Downgrades Stock

BofA Securities analyst Ross Fowler downgraded the shares of American States Water Co AWR from Neutral to Underperform and lowered the price forecast from $85 to $71.

The analyst has lowered the rating due to AWR’s relatively high premium compared to the water utility sector and the view that utilities with elevated premiums continue to witness compression versus value.

While the analyst does not see any fundamental decline in earnings quality or growth and still regard AWR as one of the best-managed water utilities, its 32% premium over the coverage and 11% premium over the water sub-group make it less attractive in light of potential multiple compression.

The premium reflects AWR’s quality factor, balanced by the analyst’s tempered view for high premium expansion and anticipation for multiple compression in a higher interest rate environment.

AWR has already benefited from recent regulatory approvals, which are reflected in the analyst’s forecast, and see few catalysts that would push the EPS projections higher over the next 12 months.

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The company, along with other California investor-owned water utilities, was granted permission to postpone its cost of capital filing until 2026, preserving the current 10% authorized ROE for that year.

The analyst’s model had already factored in a status quo ROE for 2026, but the added certainty is a positive outcome. Additionally, AWR received final approval for its California general rate case settlement.

The analyst expects the company to maintain strong growth, executing consistently. The analyst’s EPS estimates for 2025, 2026, and 2027 are $3.33, $3.55, and $3.85, respectively (consensus: $3.32, $3.52, $3.81).

While the analyst typically considers high-premium water multiples to be unsustainable compared to electric and gas utilities due to improving growth rates in those sectors and the broader expectation of sustained higher interest rates, ESG trends may still provide support for water utilities.

As traditional ESG favorites like NextEra Energy NEE shift strategies toward more gas-focused investments, water utilities remain, alongside wires-only companies, among the few ESG-friendly options for global ESG funds with U.S. exposure.

If ESG investments move away from NEE and other renewable-focused stocks, water utilities, including AWR, could see a boost from this shift in flows, concluded the analyst.

Price Action: AWR shares are trading lower by 2.77% at $72.44 at the last check Monday.

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