Investing In Water Utility: Basin Water, SBS

 |  Includes: BWTR, SBS
by: Jason S. Williams

I recently began adding Companhia de Saneamento Basico ADR (NYSE:SBS) and Basin Water, Inc. (BWTR) to my portfolio over the last several days, buying small lots on dips. I must give credit for the inspiration to Dr. Brett when he made this post (albeit a bit dated) on TraderFeed (one of the best blogs, and authors, on the web).

SBS provides basic water and sewage services to customers in Sao Paulo, Brazil. They treat, process, and distribute water, and collect, treat, and reuse sewage. I like a lot of firms from Brazil, or others that work in Brazil, namely due to their increased use of ethenal and the consequential development from a better economy and infrastructure.

They are on the brink of becoming an investment-grade country, which will further fuel their internal development and international status. Carlyle, Riverstone, and Goldman have all entered Brazil this year, most notably to acquire alternate energy producers.

Fundamentally, SBS appears to be average in the industry.
  • ROA for TTM: 4.9 vs. 2.5 for industry
  • ROA for Past 5 years: 2.6 vs. 3.3 for industry
  • ROI for TTM: 5.5 vs. 2.7 for industry
  • ROI for Past 5 years: 3.0 vs. 3.8 for industry
  • Total Debt to Equity: 63.1 vs. 111.9 for industry
  • Long-Term Debt to Equity: 52.8 vs. 96.8 for industry

For the past several years, SBS has been keeping its debt relatively low, building its infrastructure, and expanding operations deeper in Sao Paulo state. 50% stake owned by the State of Sao Paulo doesn't hurt either. Water Utilities will continue to be afforded adequate rate increases by their respective regulators. BWTR, in Q4 2007, is expected to post its first positive EPS, after years of being in the red. EPS for FY07 is expected to be -.21, while EPS for FY08 is projected to be .11, and 2009, .43.

Perhaps, most compelling:

  • Quick Ratio: 13.6 vs. 0.9 for industry
  • Current Ratio: 13.8 vs. 1.2 for industry
  • Total Debt to Equity: 0 vs. 111.9 for industry.

I'll be averaging into both positions over the next several months. As mentioned previously, I believe we have not yet seen the bottom and I am hesitant to get too deep into a long position at this point, but see significant long-term value in each of the above. More weight will be given to Basin, but SBS is a fair trade on the water and foreign investment.

Full Disclosure: I have a position in SBS and BWTR and will be averaging into each in the future.