Win A Water War With This Utility

| About: Consolidated Water (CWCO)

Consolidated Water (NASDAQ:CWCO) is an exciting "utility" with sound fundamentals. You may think this odd. Did I really just use "exciting" and "utility" in the same sentence? Consolidated Water is a Cayman headquartered company with desalination, services, and water distribution business lines. Their reverse osmosis technology removes salt and impurities from seawater to freshwater in several Caribbean countries. Consolidated Water has operations in the Bahamas, Belize, the Cayman Islands, and the Virgin Islands. In addition, it is expanding into the Asia-Pacific region with a new saltwater reverse osmosis facility in Bali, Indonesia.

Revenue & Net Income

Consolidated Water has three main sources of revenue: retail sales to consumers, bulk sales to governments, and consulting services regarding plant and distribution construction. Their retail water sales made up 37% of total revenue in 2012, bulk water 62%, and 5% from services. The slump in 2009 & 2010 was mostly attributed to the slump in tourists to many of the markets that CWCO serves. This reduced demands on water usage and thus hurt both the retail and bulk water segments.

DuPont Ratios

DuPont Table

Consolidated Water has seen robust growth in profit margin, showing the ability to keep costs under control. Profit margin has steadily increased from 11% in 2008 to 14.2% in 2012. The asset turnover ratio was significantly higher than the last couple years, indicating a management style that can do more with less. Furthermore, leverage has actually declined as return on equity increased, showing the success of a leaner, less risky company, with less money going to servicing debt.

In addition, Consolidated Water has some growth opportunities to take note of. One is a 100 million gallon/day capacity plant in Baja California. This plant already has a letter of intent from the Otay Water District of Southern California for 20%-40% of the total capacity. CWCO is also expanding to the Asia-Pacific region with a plant in Bali, Indonesia. The company expects that water demand in the tourist areas will outstrip the supply capabilities of the local public water utility. Consolidated Water has planned for initial production to be 500,000 gallons/day with the possibility to expand capacity to 1.5 million gallons/day. This project represents just the tip of the iceberg for a region that already draws the most water of any region is expected to see dramatic increases in water usage and further urbanization.

Although the company's yield of 2.5% is less than the Dow Jones Utility Average (UTIL) of 3.9%, it should be noted that CWCO has maintained or increased its dividend for over 10 years. In addition, CWCO has outperformed utilities by a substantial degree YTD.

Past Performance

Consolidated Water's prospects look bright. With talk of more droughts from climate change and increased demand desalination is a sound choice to compensate for reduced rainfall and falling water tables. Water demand will surely increase in the long term as populations increase and developing countries increase per capita consumption. Some have said for some time that fresh, clean water is the new oil. Making water accessible for use is obviously a logistics game rather than one of extraction. Excess usage, rather than depleting water as in the case of oil, merely requires an increase in purification systems. Consolidated Water is well placed to take advantage of such a world.

If it is to be believed that water is to become the new prized resource in the world, then it is prudent to invest in a company with the technical proficiency to generate ever precious fresh water from the sea.

Disclosure: I am long CWCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.