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Water is one of those products that will never go out of style. And if you happen to sell the stuff, you’re in luck because today’s markets are thirstier than ever.

Climate change is among the factors driving increased demand for fresh water; Georgetown, Grand Cayman-based Consolidated Water Co. Ltd. (Nasdaq:CWCO) is one of the leading desalination companies poised to benefit from these conditions — no matter how illiquid the capital markets get.

The $352-million market cap company runs 12 reverse osmosis seawater filtration plants and serves freshwater-starved markets in the Bahamas, the Cayman Islands, Belize and the British Virgin Islands.

Living up to its name, 35-year old Consolidated Water has been an active acquirer of other water providers and is now the regional leader in desalination technology. It has exclusive long-term, fixed price contracts in lucrative resort markets and faces little competition for its retail and bulk sales (although that could change as big, well-resourced companies like General Electric Company (NYSE:GE) enter the water industry).

Share prices had been slowly sinking for several months until investors caught wind of the company’s impressive fourth-quarter results, which included a 296% year-over-year rise in net income, a 13% rise in retail water sales, a 19% rise in bulk sales and a 588% explosion in service revenues related to the construction of two new desalination plants.

Even though the results were actually slightly under analyst estimates, the stock proved buoyant after all. On March 18, the days of the earnings news, the tide brought in a 24% rally and an upgrade to “buy” from “neutral” courtesy of Janney Montgomery Scott analyst Debra Coy.

So all these booming revenues make Consolidated Water the refreshing stock winner you’ve always dreamed of, right?

Well, there have been some rough waters for the company that have left a bitter taste in some people’s mouths. Take, for instance, the government of the British Virgin Islands, with whom the company is in a long dispute over unpaid water bills and the precise ownership of one of its jointly held subsidiary’s newer plants.

Also at issue is the worrisome sales standstill at a newly completed plant which has but one potential customer — the same aforementioned British Virgin Islands government. The matter was written about in a late December Barron’s article, which raised the specter of significant leaks in Consolidated’s bulk revenues and did nothing to help the already falling stock’s value.

But it’s not all down the drain yet, says Brean Murray Carret & Co. analyst Michael Gaugler. The British Virgin Islands paid the company $3.5 million in January for past services and in the call discussing fourth-quarter and year-end results, management indicated a strong likelihood for a positive resolution.

Gaugler said in a recent report that a negative outcome is unlikely but if it does materialize, it would be “no more than a speed bump in a road that has high visibility for future earnings growth.” However, Boenning & Scattergood water sector analyst Ryan Connors (who has the stock rated “market perform”) sees a high likelihood for a “less than ideal” settlement over the matter.

Another headwind that could potentially douse revenues in 2008 is the anticipated decrease in tourism this year from Americans suffering from tough macro-economic conditions at home. The company expects this to be moderated somewhat by business from tourists coming from other parts of the world, steady sales to full-time island residents, plant construction service revenues and the contributions of new plants coming on line.

Other sharks infesting Consolidated’s waters include execution risks for recent acquisition integration, the difficulty of sustaining meaningful growth, and the strategic-planning vacuum that will be left by the planned departure in July of the company’s 26-year executive chairman and former chief executive Jeffrey Parker.

On the bright side of things, Consolidated’s expansion pipeline is loaded with opportunities. Discussions are underway to service parts of the Turks and Caicos Islands as well as an island off the coast of Honduras. Some observers have also noted that the company is well-positioned to crack into Cuba’s markets if political conditions change there.

All in all, the stock seems to be attractively positioned when you consider that demand for fresh water is not going to evaporate any time soon.

Gaugler notes that despite the rally following earnings, the negative press from December is still dragging on share prices, presenting a compelling buying opportunity (assuming a return to normal trading levels). As such, he has “buy” rating and a $35 per share price target, based on 33 times 2009 earnings per share estimates,

What’s more, with a trailing P/E ratio of 30.99 and forward P/E of around 23.85, that kind of market-valuation climate change could be a very convenient truth for investors buying in now.

The stock closed yesterday at $24.20 per share and saw its 52-week low on March 17 at $17.50 and a high of $37.49 on Aug. 8.

Given the company’s stable presence, technical expertise, expansion capacity and recent revenue eruption, it’s fairly safe to say this is one water utility that won’t leave you high and dry.

Disclosure: none

Source: Consolidated Water: A Saline Solution