Everyone has a process for picking stocks. Many like myself, probably use multiple methods for finding quality companies to invest in. One such method for me is starting first with large impacting, long-term global trends and then identifying which companies, if any, represent a great investment opportunity.
One trend that I have been researching for a while has been the looming worldwide water shortage. Water is obviously something we cannot live without. Not only do we need water to drink but there are plenty of other reasons we need water - not the least of which are to grow crops and create energy. As such, the demand to decrease waste of and increase access to clean water will be directly proportionate to the scarcity of water.
These kinds of global opportunities rarely occur. In the event of a water shortage, water would become a commodity unlike anything we have ever seen before. This creates a terrific long-term opportunity for a company like Pentair (NYSE:PNR) that provides solutions to just about every water related challenge.
Looking further into the global water shortage, it is an unmistakable fact that the world will be facing this reality in the not-so-distant future. Water is a finite source and without it, there is no life. Some areas of the globe are already facing this reality. Some statistics according to Water.org:
- More than 3.4 million people die each year from water, sanitation, and hygiene-related causes.
- Over 2.5X more people lack water than live in the United States.
- 783 million people without water access across the world.
Looking further ahead, in a study completed by the 2030 Water Resources Group, the gap between safe freshwater availability and water demand will be about 40% globally by 2030. The full excerpt from WRG:
There is an emerging gap between safe freshwater availability and water demand in many developing and fast-growing economies around the world. Recent analysis suggests that this gap will be about 40% globally by 2030 if business as usual water management approaches continue. The economic, environmental, social and political challenges that this water gap presents governments are very real. Agriculture is currently responsible for about 70% of annual global freshwater withdrawals and up to 90% in some parts of Asia; yet governments across Asia will also need on average 65% more freshwater withdrawals for their industry and energy sectors and household use by 2030 in order for their national economies to grow as forecast and for people to have access to water."
Water scarcity is not only tied to drinking water but also closely related to the food and energy sector as well. Without water we cannot create more food or energy. Agriculture is currently the most common use for freshwater as about 70% is used for growing crops. The below image is from the Director of National Intelligence's Global Trends 2030 report:
Can Pentair save the world?:
Pentair caught my eye as they clearly understand the water shortage and its connection to food and energy. Directly from Pentair's website:
We combine global perspective and deep expertise to develop real solutions that help the world get more food, energy, and efficiency from each drop of water."
This statement is exactly what will be needed as more and more people and governments become more involved in the preservation of water.
Later in the above mentioned report by WRG's they pose the question: "With finite limits to freshwater availability (including for environmental sustainability) facing many governments across Asia, Africa and Latin America, and the Middle East how can water resources be organized to safely deliver the water needed to fuel growth, as well as for humans and the environment?"
This question will soon be asked with a grave sense of urgency and Pentair will be there to answer the call. The demand in the future will be on increasing access to clean water to those in need and reducing waste for those that already have it. Pentair is and has been a leader in helping to manage the world's water resources. Pentair provides solutions to:
- Make clean, safe water more available and affordable.
- Designs and manufactures advanced technologies for the separation of solids, liquids, and gases for the treatment and reuse of water.
- Enable customers to reclaim energy from wastewater streams.
As shown above, PNR has a huge potential long-term growth market and they clearly understand and are poised to grow into that market. They have already demonstrated this - for the developing countries that need additional water resources, look no further than what Pentair did in Honduras or Indonesia. In both of these instances, Pentair responded to their unique needs for clean water. Pentair was able to create a system using their equipment that provided this water and saved lives. They have a model for success not just with these two areas but many others and are poised to repeat it over and over again as the world population grows. This, along with 25% of their sales coming from fast growing nations, shows that PNR has the ability and track record to create solutions to the problems that many countries are and will continue to have as water becomes harder and harder to come by.
Looking deeper into Pentair:
As the business stands today, Pentair is very strong. As I always say, being a value investor, the quality of the company is of the utmost importance. The valuation does not matter if the management team cannot increase earnings. They are currently facing quite a few headwinds - particularly in the industry sector - but have still managed to increase EPS and are projecting EPS to increase a total of 20% across 2014 & 2015.
The management team sounds committed to running the company based off of what is best in the long term. As they announced on the recent call, PNR will be exiting the Water Transport business. On the surface, this will cause an immediate drop in revenues, however this allows PNR to focus on higher growth segments.
This news is particularly encouraging when you consider that it shows Pentair's dedication to run a very lean business and to continue increasing margins, much the way they did in this most recent quarter - with adjusted operating margins expanding 110 basis points. They again reiterated that they are committed to creating long-term shareholder value and have increased their dividend for the 38th straight year.
Pentair is clearly well managed, committed to long-term growth, and poised to capitalize on the growing need to preserve and give access to fresh, clean water.
At the time of writing, PNR currently trades at $67.15 with a P/E of 22.59 and a Price to book of just 2.1. With short-term growth also appearing strong, PNR has a forward P/E of 14.92 and a PEG ratio of 1.5. PNR recently raised its dividend for the 38th year in a row and now stands at 1.88%. Using the Benjamin Graham formula, PNR appears to have a margin of safety of 23% and -3% using DCF methods.
At this time for me, as a value investor PNR is not a buy, however, it is one that I will be buying on any further weakness. For GARP or dividend growth investors, now could be an ideal time to buy. The primary factor for me as a value investor is finding a quality company that is innovative and poised to be a leader for a very long time and I have found that in Pentair. If the market continues its correction into this week, it could create a fantastic buying opportunity for PNR.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PNR over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.