Diving Into the Water ETF
The trends are scary for the things that we are running out of, and fresh water is on that list. It’s what has sparked ETFs like PowerShares Water Resource Portfolio (PHO). I’m too active of an investor to use ETFs (unless they offer an edge that I can’t provide myself, like a double long/short component).
PHO is just long, and I think, contains every stock that has anything remotely close to ‘Water’ in the company description. However, I wanted to dive in, learn about the space, and cherry-pick some investments. To get a feel for the companies, I went in, read summaries and breezed annual reports making special notes about segment information where applicable.
I want to find stocks that will benefit over the next 50 years as we run out of fresh water, so while I’m sure there are great stocks in this ETF, I’m looking for specific exposure to the trend.
I pulled up the list of the heaviest components of PHO, and here they are:
AECOM Technology Corp. (ACM), Valmont Industries Inc. (VMI), Tetra Tech Inc. (TTEK), Lindsay Corp. (LNN), URS Corp. (URS), Veolia Environnement (VE), Danaher Corp. (DHR), Itron Inc. (ITRI), Ameron International Corp. (AMN), Siemans AG (SI), Emerson Electric Co. (EMR), General Electric Company (GE), IDEX Corp. (IEX), Pentair Inc. (PNR), Millipore Corp. (MIL), Roper Industries Inc. (ROP), ITT Corp. (ITT), Badger Meter Inc. (BMI), Layne Christensen Co. (LAYN), Nalco Holding Co. (NLC), Watts Water Technologies Inc. (WTS), Calgon Carbon Corp. (CCC), Franklin Electric Co. Inc. (FELE), Pall Corp. (PLL), Mueller Water Products Inc. (MWA), GormanRupp Co. (GRC), Insituform Technologies Inc. (INSU), Southwest Water Co. (SWWC), and Aqua America Inc. (WTR).
I then used Morningstar’s compare wizard to help me sort the list. I sorted the list by profitability, and PEG, and a few other criteria. I then just started reading up on the companies at the top of the list. In that order, here are my findings, notes, observations and commentary:
Roper Industries: Pass
$5.24B company
This company is by no means a pure ‘Water’ play. They are highly diversified across major industries, almost like they are wandering without any direction or specialization. It’s likely a really well run company, because they are exposed to several micro-trends and it ranked highest on morningstar’s compare. One of the businesses they are in is “Water metering & Usage information”.
Danaher Corp.: I’ll pass, but was impressed and will revisit at a later date.
$25.5B company
Q4 2007 Segment Data (pdf file)
Q1 2008 Presentation (pdf file)
http://www.danaher.com/investors/
The word ‘water’ doesn’t even appear in the the company’s description on Google, but from the company’s web site:
International concern over environmental quality is creating growth opportunities for Danaher. The group is a global leader in water quality analysis and treatment, providing instrumentation and disinfection systems to help countries and municipalities increase the supply of clean water while managing residential, commercial and industrial waste-water. Our ultraviolet treatment systems disinfect billions of gallons of water every day in more than 35 countries and we provide a broad array of environmental solutions, including underground tank monitoring and advanced vapor recovery, that are helping to protect the water supply and improve air quality.
From the Q1 ‘08 presentation, the “environmental” segment showed 25% growth.
It’s another extremely diversified company, likely well run since it came in at #2 in the Morningstar compare. The stock goes from north by northeast for the last 20 years, and it looks easy to own.
Ameron International: I like it, but am not sure yet.
$1B Company
2007 Annual Report (pdf file)
They say the best stocks to own, are the ones you don’t look for. I'm not sure if this counts, since I was looking for Water and found Wind. AMN, is apparently just entering the wind market, as it just sold its first 25 2 MW Wind Turbines. I’ve been looking to add exposure to the wind energy trend, but I’ll make that another post. Back to the thesis at hand, the exposure here is its “Water Transmission Group.” This looks like a major infrastructure play, but none the less, it is still kind of applicable. On page 68 of the 2007 annual report, you’ll find the segment income is currently split almost evenly into thirds between: “Fiberglass composite pipe, Water Transmission, and Infrastructure products.” Three years of history suggests that the fiberglass composite pipe is the segment growing the fastest. The Asian operations represented 1/6th of sales in 2007. The company lumps the Wind Sales into the “Water Transmission” category, since without counting the Wind sales in the category, sales for Q1 2008 were flat. From the Q1 2008 Press Release:
The water infrastructure market in the geographical areas served by the Company continues to be soft. While market activity in Northern California has improved, the bidding activity in Arizona, Nevada and Southern California remains well below historical levels. We expect the water pipe market to begin to recover late in 2008 and throughout 2009. Wind tower production increased compared to the first quarter of 2007. The business continues on a learning curve, but is rapidly achieving efficiencies. The outlook for the wind energy market in the Western U.S. is for continued strong growth. Longer term demand for the water pipe systems and wind energy in the Western region is expected to be strong and the Company’s businesses are well positioned to capitalize on these opportunities.
Idex Corp.: Pass
$3B Company
2007 Annual Report (pdf file)
Fluids Segments Product Lines/Brands
The ‘Water’ segment here comes in the form of ‘Fluid & Metering Technologies.’ Among other things, the company is into ‘Health & Science Technologies,’ a segment it calls ‘Dispensing,’ and lastly ‘Fire Safety.’ It was an eye-opener to find out, on page 2 of the 2007 Report that says only 3% of sales comes from “Water Treatment” and the rest of its sales are in highly diversified areas. After seeing that break-down, I chose to move on in my search.
Valmont Industries: Pass
$2.9B Company
2007 Annual Report (pdf file)
With a slogan like “Conserving Resources. Improving Life” I got excited. Wow, that’s some deep branding. The company breaks down it’s highly diversified segments into irrigation, coatings, engineered support structures, and utility support structures. As expected, growth YoY was highest (24.3%) in irrigation and it is its second largest segment which came in at $390M in sales. The other three, were $110M, $580M, $330M respectively. While it’s not a pure play, since the engineered support structures had the slowest growth, the irrigation component is the growth driver here.
Franklin Electric Co.: I like it, but I’m not sold yet.
$900M Company
2007 Annual Report (pdf file)
Upon reading the google summary, I became impressed by the company expanding towards Canada, South Africa, and Brazil through acquisition. They currently design, manufacture, and distribute ground water and fuel pumping systems in all major countries. I like the spread they have through the supply chain, and the fact that the management appears to ‘move’. Net Sales were pretty much flat YoY for Water Systems, growth has been in the Fueling Systems space. Water Systems accounted for $466.8M in Net Sales, while Fueling Systems accounted for $135.2M. That makes Franklin Electric Co., the closest thing, reviewed so far, to a pure play for Water Systems.
Layne Christensen Company: I kind of like it, and will come back
$900M Company
2007 Annual Report (pdf file)
There is a pretty wide mix here, as its revenue spans Natural Gas Sales, Mineral Exploration and Water Infrastructure. The company operates throughout North America, as well as Africa, Australia, Europe and, through its affiliates, in South America.
From the Company’s website:
…provides a full line of water-related services and products including hydrological studies, site selection, well design, drilling and well development, pump installation, and repair and maintenance. The division’s offerings include the design and construction of water treatment facilities and the manufacture and sale of products to treat volatile organics and other contaminants such as nitrates, iron, manganese, arsenic, radium and radon in groundwater.
Segmented Revenue for ‘07 was 75% from “Water and Waste-water infrastructure,” 21% from “Mineral Exploration,” and 4% from “Energy.”
ITT Corporation: Pass
$12B Company
2007 Annual Report (pdf file)
The chart on pg 24 of the annual report pretty much summarizes the segments of ITT, and the growth drivers behind each segment. The company is divided into Defense Electronics & Services (46% of ‘07 revenue), Motion & Flow Control (15%), and Fluid Technology (39%). It did seem as if the company is in a strategic position, targeting the water ‘crisis’. For instance, they sponsored a National Geographic documentary, on the topic. Although, too much of this company is focused on defense for my liking. I really don’t want to invest in that, since I don’t think defense spending can continue in the US.
Gorman-Rupp Company: Pass
$600M Company
2007 Annual Report (pdf file)
Nothing flashy here, they sell pumps. 71% of sales are from US, the rest is ‘foreign’ countries. Pumps for pretty much every application, along with the controllers to go along with it. The stock is up 19% YTD, at an all-time high.
Lindsay Manufacturing: Interesting, but I'll pass
$1.3B Company
Investor Relations: Annual Reports
How does a $1.3B company get into innovative irrigation equipment as well as road safety products & services? None the less, Lindsay does it. 77% of revenue is from irrigation while the rest was from the infrastructure side of the business, in 2007.
General Electric: Pass
$320B Company
2007 Annual Report (pdf file)
Of the six segments, Infrastructure is the largest, which generated 32% of revenues. That segment includes technology and services in ‘Aviation, Energy, Oil & Gas, Transportation and ‘Water.’ There’s no way around it - I don’t think it’s anywhere near appropriate to call GE even close to at all a ‘Water’ stock.
Emerson Electric Company: Pass
$44.8B Company
2007 Annual Report (pdf file)
Emerson is another stretch of a stock, that likely doesn’t belong in PHO. Seriously, five segments, with the smallest being 16% of the business, and the largest being 25% including Process Management, Industrial Automation, Network Power, Climate Technologies and Appliance & Tools.
Watts Water Technologies: I like it, but the stock chart worries me. I will watch for strength.
$1B Company
2007 Annual Report (pdf file)
Here it is, a company that truly deserves to be in this ETF. They do water safety, water quality, water flow control and work in the conservation market. The company should benefit from the world’s water problems. They operate in North America, Europe and China. They work all over the board in many different spaces selling solutions to countries and customers who will need more and more in the years to come. I’ve barely skimmed the annual report, because I want to come back to this one.
Pentair, Inc.: With more details, I’d probably buy it.
$3.7B Company
2007 Annual Report (pdf file)
From the company’s Website:
Pentair’s Water Segment – including global Filtration, Flow Technologies, and Pool and Spa businesses – helps deliver safe, clean water to people who need it. Page 6 and 7 of the annual report have a geographic break-down of their business segments, which over half of sales in all categories was to US customers. Filtration was the most globally exposed category, sales to the US were 56% of the segment. Unfortunately, I couldn’t quickly find a segment comparison, so I have no idea if the filtration business is 5% or 95% of the company.
Badger Meter, Inc.: I like it, but I’d like more global exposure.
$725M Company
2007 Annual Report (pdf file)
Just like the name suggests, they sell meters. Almost their entire business is selling American utility companies the meters to monitor both water and waste water. In their report, on page 5 it says:
Projections show 35 of the 50 states will face water shortages over the next five years.
The report points out that they are working hard at tapping the estimated $6.5B market for automatic readers.
Pall Corporation: I like it, but am worried about management.
$4.6B Company
2007 Annual Report (pdf file)
Pall helps its customers in a wide array of industries with purification and filtration needs. It’s best to see the list for yourself. 24% of sales were from Asia, 41% from Europe, and the rest, 35% was labelled the ‘Western Hemisphere.’
Itron Inc.: I like it, but am worried about valuations.
$2.9B Company
2007 Annual Report (pdf file)
This has been an amazing good investment for current shareholders, it seems to be BMI’s big brother in size and global market share. It has a surge in revenue that has sent the stock soaring, and has also led to a huge hiring frenzy. It sells water metering solutions to utility companies for monitoring and conserving. The company also services the electricity and gas markets.
Aqua America, Inc.: Pass
$2.26B Company
2007 Annual Report (pdf file)
After my extremely thorough 10 second scan of the Google summary and 2007 report, I quickly wanted to move on. This completely American company provides water and waste-water services to most of the U.S. This is an example of a company without great prospects ahead, and the stock valuation isn’t reflecting this trading at 26 times forward estimates. It’s a good example on how ETFs rope in the good in along with the bad.
Millipore Corporation: It’s hardly a water play, so pass, but I’m coming back to learn more.
$4B Company
2007 Annual Report (pdf file)
So, somehow this bio-pharmaceutical supplies company got roped into PHO, but I'm not sure how. Okay, it does have one segment where it specializes in ‘Lab Water Services,’ and it sells filters for many life sciences applications, but a ‘Water’ stock - it’s a stretch. The company is extremely well diversified geographically, and is not over-, or under-exposed anywhere.
One of its strategies from the 2007 report:
We will focus our resources on fast growing segments such as disposable manufacturing for biotechnology customers, drug discovery products and services, as well as cell biology and protein research. From a geographic perspective, we will continue to expand our Asian operations as we invest in people, training and infrastructure.
I’m intrigued by this unique company, but I don’t know enough about the industry. I will revisit it, after I pick some real ‘Water’ stocks.
Calgon Carbon Corporation: Pass, but I’ll be back.
$750M Company
These guys are cleaning water and air, of CO2, and I kind of like that. Calgon benefited from the restructuring in Activated Carbon Market, according to its annual report. I suppose that is why the stock tripled to +10 year all time highs last year. It is also into Mercury removal, ultra violet light purification systems, and ion exchange systems. I like the exposure to the ultra violet light purification market, since it should grow with the water crisis.
Insituform Technologies: Pass, but will come back.
$500M company, with a stock chart that looks like a 20-year roller coaster.
2007 Annual Report (pdf file)
...repairs more water, oil and sewer pipes than any other company in the world.
Most pipe networks were built 60 years ago, they were supposed to only last 50 years, now 73,000 repairs are needed every-year.It had a couple cool videos on how ’sink-holes’ are formed. I Learned something there, check ‘em out. In 2007, 34% of its revenue came from outside the U.S. This is more a play on aging infrastructure in the U.S. and other countries. It seems a stretch to relate this to ‘water,’ but if there is any truth to the company’s statistics - it’s a space that’s about to boom.
Nalco Holding Company: Pass
$3.5B Company
2007 Annual Report (pdf file)
The largest segment of Nalco, is an example of what should be in PHO, the smaller two segments, sort of water it down as a pure play. It’s a holding company that does purification and treatment of water that is used in several spaces. Here is a quote from its 2007 report:
Water scarcity in many regions is pushing industry to re-use water that often would have been released in the past - requiring our expertise.
I didn’t particularly like the goals the company set out for 2008, it sounds as if it goals say, “We’re going to try and keep our heads above water” (pun intended).
The company is diversified across three market segments:
1. Industrial & Institutional Services: This is primarily the ‘water’ play component of the company, focusing on efficiency, re-use, and water treatment solutions. Did $1.8B in Net Sales for ‘07
2. Energy Services: This is where the company is not so much a ‘water’ play, they are into oil and gas process improvements, but they are focused on helping customers minimize emissions and meet environment regulations. Did $1.2B in Net Sales for ‘07.
3. Paper Services: Another watering down of this ‘water’ play, pun intended, this segment. It did $0.7B in Net Sales for ‘07.
Siemens AG: Pass
$107B Company
2007 Annual Report (pdf file)
It is not a water company. I was curious, I looked up the segment information, then upon finding on the 124th page, the segment information spanned 9 or 10 segments - none of them point blank screaming ‘water.’ I just want to say, Siemens had one of the longest, lamest and hardest to use annual reports I’ve ever seen. It was 300+ pages - Ugghh. Less is more.
URS Corporation: Pass
$4B Company
2007 Annual Report (pdf file)
This was another debatably useful annual report. I spent 10 minutes looking through the 50-page document, and couldn’t find any revenue breakdown across its eight divisions. Maybe I’m blind, maybe I don’t care, because bottom line is, no matter what, it’s not nearly a pure play because I repeat, EIGHT divisions, spanning: Transportation, Homeland Security, and other catch-all categories like Facilities, Environmental, and Commercial/Industrial. But, don’t get me wrong, one of the segments was referred to as ‘Water/Wastewater.’
Tetra Tech, Inc.: I like it, and I might buy, but will revisit at a later date.
$1.5B Company
2007 Annual Report (pdf file)
“5 years in a row, Tetra Tech is #1 in Water” - tetratech.com. I wonder if it put that there in order to be included in PHO? (I kidd.)
It is at the forefront of 70 Wind projects in 35 states - cool, but out of the scope this investigation.
Seriously, it is into many different engineering services including water, some green building design, and wind - among other things, check it out. I think this is a company in every space that I want to invest in right now, regardless if it isn’t a pure ‘water’ play. Sadly, I couldn’t find any segment information.
Southwest Water Company: Pass
$250M Company
2007 Annual Report (pdf file)
It provides water and waste-water services to U.S. customers across 10 states. I saw nothing that impressed me here.
Aecom Technology: Pass
$3B Company
2007 Annual Report (pdf file)
There is only a tiny bit of exposure to water and waste water facilities here, otherwise it is a diversified engineering and infrastructure services company. It is nothing special, and I don’t want to own it. You definitely can’t call it a pure play.
Mueller Water Products, Inc.: Pass
$1B Company
2007 Annual Report (pdf file)
These guys sell the parts to the infrastructure companies. In what is one of the best depictions of what a company does, on page 2 of its 2007 Annual Report, it laid out it what is does out graphically. Bascially what the company does is provide all of the valves and hydrants for both water and waste water lines. Yes, we’re talking fire hydrants.
Veolia Environment: Pass
$33B Company
2007 Annual Report (pdf file)
These guys operate in four spaces: water, environmental services, energy services and transportation. 34% of sales come from ‘eau’, and revenues are primarily from Europe. Thus I can conclude it’s definitely not a pure ‘water’ play and this stock isn’t for me.
Conclusions & General Observations:
Not a single stock in PHO screamed ‘buy me now,’ but there were lots of different ideas. The companies that are actually in the space, generally concur that there is a shortage of resources ahead, and it is going to drive growth. I'm not sure investing in water infrastructure is a smart way to play the ’scarcity.' I’d rather just invest in the names purifying and filtering. If there was a company desalinating, I’d be all over that - but I didn’t see one here. The metering market seems to be penetrated by two companies, it’s measured to be $6.5B in the U.S., and will likely create a boom followed by a bust in the market. In my opinion, there are some stocks that don’t belong in PHO. There are some poor performing companies, that might belong in PHO, but it is likely that a smart investor wouldn’t want to hold any position in them. ITT And Insituform are both sponsoring different documentaries on raising ‘awareness’ of the world's water problems. They are both scheduled for spring/summer of 2008.
Disclosure: No position in any stock mentioned.
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This article has 33 comments:
Schweitzer
As a former owner of what is now one of the components of LAYN, I keep in mind a statement of its founder of the rising importance of "Water Chemistry" or water treatment.
Generally, and probably rightly, left out of this sector analysis is "water transport" (pipelines, etc). But it is an element to consider.
Do your own research.
Thanks.
www.cnbc.com/id/158402...
Jason Bourne - I know the prospectus, but I just think it's a stretch...
Richard - I'm glad you appreciate it
daniela - Yes, it is nothing more than MY notes, and I did spend only 10s of minutes on some companies...so you are correct, shallow is what you do when your skimming 29 annual reports
J Rapp - Maybe...I'll check it out
Finding Beta - Yah, I know, and I found out after this was published TTEK does desalination, I bought TTEK this afternoon
Finding Beta - Right, but both those two companies market cap won't even notice
aafine - joining you on that, glad you liked it, and as of this afternoon, I'm now long TTEK
www.gewater.com/what_w...
everywhere
A quick google search found Energy Recovery which is a water desalination company that filed for IPO in April:
www.sec.gov/Archives/e...
www.forbes.com/2008/05...
www.bloggingstocks.com.../
TC
www.veoliawater.com/
But they are in the EAU!
Psst!
That just means they filter out the "Cryptosporidium&... from their water, unlike many locations in North America.
Those crazy Eurozonies, what with their "science" and "education" and stuff!
I wonder if this person could ever find someone to marry!
The PHO ETF has performed quite well, and much better than the broader market. I know, I've owned it!!
Let's look at the fundamentals.
1) many of these companies have minimal exposure to the water business and therefore it's not going to be a key driver of their stock prices.
2) the water sector is phenomenally difficult place to make money or earn a return above the cost of capital.
- it's tough to raise prices as a utility.
- you can't cut people's water service off when they don't pay without getting lynched.
- the companies that have low-tech products like pipe and valve makers typically get much of their revenue from oil and chemical plants.
- pipe and valve makers are screwed because these are commodity products get killed by high energy and materials prices buy they sell mostly to cash-strapped municipalities that buy via an RFP process which 90% determined by how low the price is. "My valve is better than yours"? Gimme a break.
Even when you look at Layne Christiansen or Flowserve, you'd really struggle to find much exposure to water either.
- Water utility companies have a disastrous history in developing countries (see Suez, Vivendi, Veolia) and get their systems nationalized, etc.
- Calgon Carbon is subject to intense competition from China and has management NOT "smarter than your average bear."
- Desalinization is running into big problems because it uses a ton of energy (costly) and creates some significant environmental hazards. It's good for places that have cheap energy (Libya, Persian Gulf) but otherwise it's a long way from being a good long-term solution. It just sounds sexy to investors.
- Millipore has almost zero exposure to water.
- Water utilities tend to never earn their cost of capital
- At the end of the day, I doubt you really could make an investment worthy water index because there are so few quality companies that can can grow and have high exposure to the sector or to some macro trend like increasingly scarce water. It's a nice idea in concept, but very, very tough to achieve an investment fund worthy of the theme. That said it's an easy way to market a "theme" that will grab unsophisticated investors' attention and money. I'm sure the product providers are laughing all the way to the bank.
FYI Water companies worth a look are Biotreat in Singapore or Eurodrip in Europe - but those are very speculative.
n
www.billakanodoodahs.c.../
It may be a "water" index and a "water" ETF, but very few of the companies are pure plays on water and very little of the net revenue of the portfolio represented by the ETF comes from water.
To the commenters: Hey, if you want to trade it technically, go right ahead! It's been a good trade several times! Just don't jerk your own chain and pretend you're really "invested in water" by owning the PHO, because you'll only be fooling yourself.
Kornfeld
It might be a good sign for company growth.
www.businessweek.com/i...?
While the criticism of individual companies in PHO is quite valid, in many cases it is because the ETF (and much of the public) is jumping on water very late. Mario Gabelli had been preaching water for years!
As for other water related companies: check many of the basic chemical companies for water purifying chemicals. Check some of the agri equipment companies. Pipe companies (plastic and metal)have been bought out but others remain. There are companies that own water rights. Check out CADIZ and PICO. And as one of the other comments suggested, check on global water companies, from Austria's BTW to Japan's Kurita, France's Suez, and companies in Italy, Finland, and elsewhere. But still here in USA: Mueller Water, Chart Industries (though it has had a run-up) and various fluid flow control/measurement companies.
Unfortunately, by the time CNBC and others get around to a topic, it's too late to make the initial big money. I know casually one of the hosts on CNBC and have bugged him for years about not reporting on water. He blew me off each time, finally telling me that when water really becomes scarce, the govt. will take it over and no one will make money off water! Sure, just like with oil and gas!
So do research. There are a number of private companies that are good with water. Keep an eye out for IPOs. But if Immelt would make GE Water a stand alone company, it would be better than VE because it has gobbled up every water related company it could over the last few years. Basin Water has been a notable failure in water, due to financial shennigans and I have not made any money off Euro Tech Environmental, but there are still possibilities out there even if the early money (as with CCC and others in PHO) has been made. Tom
M.