Water Infrastructure Attracts Big Spending But Filtration has the Momentum

“Water, taken in moderation, cannot hurt anybody” – Mark Twain

Our latest ChangeWave Alliance water survey served up such a reservoir of positive data on the industry that we’ve written two reports on the findings.

In the first report (Aug 2007), we looked at broad industry trends, and found that spending on water infrastructure projects in North America and China were the biggest drivers of growth. GE Water was the easy winner.

Now our focus turns to the sector level and zeroing in on the best prospects among mid- and small-cap companies.

Sectors Attracting the Most Spending

Having completed our second water survey of the past year, we now have the benefit of comparing changes over time -- in this case 7 months.

Water Infrastructure Repair and Replacement is again seen as the sector attracting the most spending over the next 1-2 years, but Water Filtration and Desalination show the greatest momentum.

Tunneling Down

We also turned our attention to the specific treatment technologies that will be most widely deployed over the next two years. Here's what we found:

Focusing on specific treatment technologies, which of the following do you think will experience the most new deployments over the next 12-24 months? (Choose No More Than Two)

A surprising one-third of respondents believe Ultraviolet Disinfection (32%) is the specific treatment technology that will have the most new deployments over the next 12-24 months. Two filtration technologies -- Low Pressure Filtration (26%) and High Pressure Filtration (26%) – were tied for second place.

We also wanted to learn which sectors would experience the biggest technology breakthroughs:

Which water sub-sector do you think will experience the biggest new technology breakthrough in the next 12-24 months?

Industry respondents believe the Desalination sector (31%; up 6-pts) will see the biggest breakthroughs, with Water Security & Monitoring (17%; up 10-pts) coming in second.

Taking the Dip

Finally, we asked industry respondents which water-related companies should be on our radar screen over the next 12 months. Here are the highest ranked companies:

• GE Water (GE). No surprise here – respondents rank GE Water (18%) as the top company in the industry. But, GE’s water unit accounts for less than 2% of overall revenues, so the impact on their business will be minimal.

As one industry respondent puts it, "GE has become a major player in this industry. They can provide the technology, engineering, financing and the manpower to operate these infrastructures."

• Veolia (VE) – an environmental services company – captured 9% share in our survey. By providing water and waste management services for municipal and industrial customers, they are responsible for nearly 117 million people over five continents.

According to one Alliance member, they have even more room for growth. “Veolia is very active in all segments of the market, with ongoing discussions to expand through acquisitions."

• ITT Corp. (ITT) (9%) is one of the largest global producers of pumps and water treatment equipment, with a presence in more than 130 countries. The bulk of their business comes from North America, followed by Europe and Asia-Pacific. One industry member applauds their acquisitions, and notes their “broad product lines and well integrated strategy.”

I also want to mention Basin Water (BWTR) – as it’s one of the very few microcap candidates in this sector. This California-based company designs, builds and implements systems for treating contaminants in groundwater.

As one respondent writes, “Basin Water’s patented Ion Exchange process has the lowest wastewater percentage and a low capital cost of equipment. They also have the fastest order to market timeframe (3 mos.) – which eliminates the need for a test plant. “

Riding the Wave

I suggest every investor ride the global water wave. Of course, it can be a daunting challenge to sort through the myriad companies. One way to participate is to invest in an ETF with a water focus, such as PowerShares Water Resources (PHO).

Yet no matter how you choose to invest, it’s crystal clear that the water industry will see above average growth well into the future. Now's the time to dive in.

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This article summarizes the results of a recent ChangeWave Alliance survey. The Alliance is a research network of 11,000 business, technology and medical professionals who spend their everyday lives working on the front line of technological change. For more info on the ChangeWave Alliance, or if you are interested in joining, please click here.

Comments

[Robh81739]

I was aware of the crucial role of water infrastructure development will play in Asia and the US west, but even as a recent owner of Basin Water, I learned more reasons to own it. I was also unaware of the apparent filtration R&D. I want to be informed, especially of small companies that make breakthroughs.

[Vernon Tyson]

I did not see any mention of Veolia's recent licensing MagSep technology from Mr. Steve Cort. This should give them the most effective high speed clarification of wastewater and drinking water in the industry. You should check it out.

[EnergyDiversification]

You highlight all the right issues that will need to be addressed, or will address us over the coming years if we do not improve our water infrastructure.

However, several issues leap out:

1. We have been hearing about the need for water infrastructure spending in this country for years. Every disaster (blackouts, bridge collapse, etc) is positioned as the catalyst for infrastructure spending. Is it fair to say this will be a 10 - 20 year spending ramp, rather than a near term (1-3 year) event?

2. Given that most water systems are government run and financed (through user fees and bond issuance), a recession could reduce tax revenue and push back these improvements? (Note -- As you point out, this could benefit high-tech band aid solutions like INSU.)

3. With respect to China, this needs to be flushed out, so to speak. The Olympics are almost here, so we can't use Beijing as an argument for why the Chinese need to accelerate spending. China just reshuffled its infrastructure leadership. Do you have any specific insight on how exactly China's water upgrades may play out? (What about companies like Epure and Doosan, with a big presence in Asia?)

4. Your water surveys are very interesting to consider. Of course, given the years of infrastructure expectations that have not materialized, have you back-tested these surveys over the years to see if the respondents are good predictors? Or do they suffer from center-of-the-universe syndrome as many bureaucrats do?

Final comment: It will be useful to see how solar energy spending by governments plays out over the next year or two. Will government spending cutbacks reduce the enthusiasm for these subsidies? Or will the focus on infrastructure and energy needs keep them subsidizing solar power? I am not arguing for solar power; rather pointing to it as an indicator of how tough economic times could lead to *reduced* infrastructure spending.