If you don’t believe in James Bond’s latest adventure, believe many of the major investment banks and firms that are buying into Water and related (treatment, supply, processing among others) industries, believed to be the next big bang! As global economies expand, particularly in emerging countries, the demand for water should outrun demand for several other agricultural commodities. Economic and population development is likely to propel the need for higher sanitation and treatment of water.
PowerShares Water Resources (NYSEARCA:PHO) is an exchange-traded fund that aims to replicate the Palisades Water Index portfolio by investing in companies that are involved in the treatment of water and/or the technology thereof. It last traded at $19.39 with a 52-week range of $14.42-$20.61. The P/E is currently 17 and the yield is .78%. The biggest holdings include Nalco Holding (NYSE:NLC), Valmont Industries (NYSE:VMI) and Kemira (OTC:KMRAF).
The ETF has a year-to-date (YTD) return of 2.34% compared with a category return of 3.28% and 6.02% for the S&P 500 TR (NYSEARCA:SFLA). Over its lifetime it has returned nearly 28% on the market price. Being an ETF, it is easily tradeable and offers solid liquidity, apart from having low transaction cost for such a significant amount of diversification.
Aqua America (NYSE:WTR) is a utility company that provides water and wastewater services across the United States, including the states of Pennsylvania, Texas and New York. The company is organized as a holding company with stakes in local subsidiaries that provide services to a specific area, the largest being Aqua Pennsylvania, which accounted for nearly half (53%) of its revenue. The stock is currently trading at $21.81, toward the higher band of the 52-week range ($18.9 - $23.79), just below the 50-day SMA, which has recently been intersected by the 200- day SMA from below.
The stock offers a P/E ratio of 22.6, which though higher than the industry average of 19.58, still offers significant value as it’s at its 5 year low (or about). The dividend yield is 2.84, which has remained consistently about the industry average and constalty increasing every year. With its 19 acquisitions in the last fiscal, it shows solid growth prospects in an industry with limitless demand.
American WaterWorks company (NYSE:AWK) is another solid bet in the water industry, a close peer to Aqua America. This company operates both regulated (non-contract, residential, commercial/industrial water supplies and wastewater treatment) and non-regulated, now known as market-based (contract operations primarily). The company’s customers are primarily residential, accounting for nearly 80% of its operating revenue. The contract business relies on the military, municipality, food and beverage and other institutional customers. Terratac, a division within the market operations group, provides management and disposal of solid bio-waste and wastewater by-products.
The stock is currently at $28.99, nearing the higher end of the 52-week band of $30.7-$20.97. the company offers a bargain valuation (below industry averages) and a solid payout ratio (54.74) as well as dividend yield (3.17), well above the industry norms. The company has been landing excellent contracts in Massachusetts, and Missouri, among other states, and while the forward P/E is slightly lower than trailing P/E at 15.67, the company is a utility after all, and it has beaten analyst estimates time and time again. Compared with companies such as Veolia and Southwest Water, the company has far better prospects and a dividend payout higher than the industry.
Danaher Corp (NYSE:DHR) is a diversified engineering company manufacturing a wide array of instruments, devices and equipment for medicine, industry, testing and measurement and many more. North America occupies just about half of the revenue pie with a significant presence in several other locations, including Asia, Europe and Australia. Fluke, Tektronix and Matco tools are some of its biggest brands, in addition to its water quality business, which is covered under the environmental segment. The water connection here is in the derived category, as it manufactures the test and analytical instruments used in water supply and treatment.
The stock is currently trading at $50, nearing the 52-week high of $56.09, somewhere between the 50- and 200-day SMAs. The stock price has consistenly risen over the last 3 decades that the stock has traded, and the financials are all in the right place. Free cash flow has gone up substantially and the PEG ratio is a very comfortable 1.22. the company has been active in acquisitions, particularly EskoArtWork, and the active bids for Beckman Coulter, which have been stepped up in the recent past. The stock is an excellent bet despite a slightly lower dividend yield of 0.16 and payout of 2.75.
Pall Corporation (NYSE:PLL) is another equipment play in the water business, manufacturing filtration, separation and purification equipment and technology. Its main business segments are life sciences, wherein its customers including labs, pharma, biotech and Food and Beverage companies. Its point of entry water filters are particularly popular. The industrial segment covers the energy, aeropower, microelectronics and of course, water treatment customers. The stock last traded at $54, within the 12-month range of $59.5 and $33.72. The P/E ratio is 23.41, a slight discount to the industry average of 25.90 and the PEG ratio is 1.61.
The company has decided to acquire its distribution partner in Brazil, Engefiltro, a move that will only strengthen its market position in Latin America, in particular, Brazil, which is already one of the most important economies in the world. In addition, the product portfolio is particularly attractive with industry leading technologies and high productivity and efficiency ratings. Moving forward, there is rumor in the wind of a possible buyout, fueled by the departure of ex-CEO Eric Krasnoff. The company still offers excellent returns, increasing dividends for the 7th year in a row.
Tetra Tech (NASDAQ:TTEK) is an engineering company that provides consulting, engineering, construction management and technical services in the area of natural resources, particularly water and energy. The company operates in 4 segments - Engineering & Consulting Services, Technical Support Services, Engineering & Architecture and Remediation & Construction Management. The 52-week price band is rather slim, with the price ranging from $18 to $27.16. The last traded price is $22.47, with a P/E ratio of 16.64.
The price has shown some weakness lately, which analysts are seeing as a major buy opportunity. The company was recently awarded a $115mn USAID contract, in addition to a $31mn Navy contract among several others. The management has been shuffled of late, and after the Fransen acquisition in January 2011, Proteus engineering (Australia) looks to be next in the cards. Q1 2011 in July has witnessed a 32% jump in revenue on a year-on-year basis, with the net income jumping 22.1%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.