President-elect Obama wants to stimulate the economy by going the FDR/WPA route of creating two million jobs to fix America's aging roads and highways. He may want to add the country's crumbling water system to his infrastructure To-Do list.
An article addressing just this point was published in last weekend's Parade Magazine. Entitled “Our Crumbling Water Pipes”, the article cited recent major water main breaks in cities around the country that spilled millions of gallons of drinking water. The EPA estimates that fixing our aging pipelines will run in the neighborhood of $277 billion; not replacing it will it will cost even more due to the loss in potable water caused by underground leakage. In Western states especially, water is becoming an increasingly valuable commodity and any attempts to contain excess waste will be strongly encouraged.
So, how can we play this situation?
We can look at water pipe manufacturers, pipe maintenance and repair companies, and heavy-duty construction contractors. But the stocks I really like and are the purest plays are those involved in what is known as trenchless replacement technology. What this means is that instead of digging up the old, corroded pipe, you dig a hole at either end and literally “pull-through” a new pipe. How cool is that? There's also a similar technology called trenchless pipe rehabilitation that will automatically repair a leaky pipe in a similiar manner. Trenchless technology seems like the least expensive and quickest way to repair and replace our aging water pipe infrastructure, saving a lot of construction time and materials over conventional methods.
Of course, that doesn't mean that trenchless technology will put the steel and concrete pipe makers out of business. Trenchless technology only addresses existing pipelines and we will always need new ones. Here's a couple of companies that have direct involvement in water pipe manufacturing.
Northwest Pipe (NWPX): Manufactures high-pressure steel pipeline systems for use in water infrastructure applications, primarily related to drinking water systems.
Ameron (AMN): Manufactures concrete and steel products for several infrastructure applications. Its Water Transmission Group manufactures and supplies concrete and steel pressure pipe, concrete non-pressure pipe, and protective linings for pipe and fabricated steel products. This is the only company mentioned here that pays a dividend (3.2% current yield).
Trenchless Pipe Technology companies
These are the direct plays on infrastructure repair and replacement. I prefer Insituform because it's the purest one of the two.
Insituform Technologies (INSU). The company is a worldwide provider of technologies and services for rehabilitating sewer, water and other underground piping systems without digging or disruption. The company operates in two segments. The rehabilitation segment provides trenchless methods of rehabilitating sewers, pipelines and other conduits using a variety of technologies including its cured-in-place pipe process. The Tite Liner segment provides a method of lining new and existing pipe with a corrosion and abrasion resistant polyethylene pipe. Most of the company’s installation operations are project-oriented contracts for municipal entities.
Layne Christensen (LAYN). This global company provides drilling and construction services and related products to the water infrastructure and mineral exploration markets, as well as producing unconventional natural gas for the energy market. In the water market, the company's pipeline business is handled by recently acquired Reynolds, Inc., and its pipe renewal and rehabilitation services are conducted through its Inliner Technologies Division. Today, an analyst at DA Davidson upgraded the company from Underperform to Neutral.
Note: There are other companies that also provide trenchless services but they are all privately held.
Sterling Construction (STRL). Sterling is a heavy civil construction company that specializes in the building, reconstruction and repair of transportation and water infrastructure. Transportation infrastructure projects include highways, roads, bridges and light rail. Water infrastructure projects include water, wastewater and storm drainage systems. The company's operations are focused mostly in the Southwest.
How to play them
Many of these companies have lost over half their market value in the past several months. Although they all experienced a nice boost today and some look like they might be putting in a double bottom, I would be a cautious buyer here. I think today's market rally is just a pre-Thanksgiving head-fake, so be careful! Add the ones you like to your long-term portfolio watchlist and if you really want to own some, start buying in dribs and drabs.
Disclosure: The author holds no positions in any of the above mentioned stocks.