The Lure Of Liquid Assets by Christopher C. Williams
Highlighted companies: Aqua America Inc. (NYSE:WTR), Pentair Inc. (NYSE:PNR), Watts Water Technologies Inc. (NYSE:WTS), Veolia Environnement SA (VE), Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS), General Electric Co. (NYSE:GE), Suez (NYSE:SZE), ITT Corp. (NYSE:ITT), American States Water Co. (NYSE:AWR), United Utilities plc (UU), PowerShares Water Resources ETF (NASDAQ:PHO)
Summary: The water sector is on fire: The Stanford Washington Research Group Water Index of 20 U.S. and international stocks has returned 131% in the past five years (vs. 4% in the S&P 500). "Much of the easy money has been made, but investors willing to cast their nets a bit wider can find compelling bargains." Barron's profiles six such companies:Quick comment: The article notes: "The year-old PowerShares Water Resources Portfolio (PHO), an exchange-traded fund, is a basket of global water stocks; it's up 15% on the year" • Faisal Laljee calls water "the new oil" and Roger Nusbaum includes it in his "long-term themes" • Utility analyst Sandy Cohen tracks the water utility industry • Debra Fiakas likes Basin Water Inc.'s (BWTR) proprietary ion exchange system for an emerging player in water treatment; John Bethel likes Mueller Water Products Inc. (NYSE:MWA); Hillary Kramer calls Tetra Tech Inc. (NASDAQ:TTEK) an overlooked stock in a strong market • Profiting from Water with The Water Resources ETF • The Water Industry's Pumping On All Lines • ETFs to Own • The Bull Case for Water • Investing in Global Water Stocks • Entering International Waters -- For Investment
(1) Aqua America Inc. (WTR): They provide water and waste-water systems to 2.5M customers. They are the "leading acquirer" in the sector, having snatched-up over 100 smaller fish in the past five years. Current revenues are about $500M, and rate increases are between 3-5%. As the industry leader, WTR is well positioned to benefit from government infrastructure spending estimated at $280B over the next 20 years. Shares ($22.90) trade at 27x estimated earnings, but are cheaper than their March high of $29.79. Management targets 7% annual revenue growth and a 5% dividend yield; analysts say it should have no trouble reaching these. "If the company stays on course, its shares could appreciate more than 20% in the coming year -- continuing a decade-long trend of 25%-plus annual gains."
(2) Pentair Inc. (PNR): They make fluid-handling systems and industrial products; sales of water and waste-water pumps are 74% of its $3B in sales. It is the dominant player in the water-components market; analysts believe it could attract buyers, perhaps within a year. It is boosting its share-buyback program, streamlining management, and expanding in emerging markets such as China. At $29.51 it is 16% off its March highs, and trades for 14x estimated earnings of $2.12/share. "Earnings could rebound sharply and push the stock back to the mid-30s."
(3) Watts Water Technologies Inc. (WTS): Maker of valve and flow-control products. It has doubled its business in the past five years, mainly through acquisitions. It has been expanding overseas; over 30% of its business comes from Europe and China. They too stand to benefit from government infrastructure investment (see above). A housing-market slump and higher copper costs could pose problems. WTS has a history of beating analysts projections; it reported a 32% increase in Q2 sales, and a 12% increase in EPS ($1.67) last year. At $36.22 (down from a $40.03 high in May) it trades at about 16x earnings. "Earnings per share could jump to $2.16 this year, and grow by 15% in each of the next three years."
(4) Veolia Environnement SA (VE): Water revenues account for over 30% of the French company's €25B revenues; other industries include energy and transportation. It is the world's largest water utility, and stands to benefit from an estimated $600-$700B European water investment over the next 20 years. More than half of its business comes from outside France, and France itself is the world's second-largest water consumer per-capita (U.S. is #1). Its shares fell recently on news it may acquire Italian builder Vinci, but rebounded when the deal fell through. Its shares (€47; U.S. depositary receipts $59.29) are 16x 2007 earnings. "If Veolia focuses on cutting costs instead of striking potentially disruptive deals, its shares... should remain buoyant, and profits could grow by 18% a year."
(5) Companhia de Saneamento Basico do Estado de Sao Paulo (SBS): The Brazilian company is the Americas' largest water utility and #3 worldwide. Last year's $2B in sales came mainly from contracts with municipalities. It has been awarded rate increases that exceed the rate of inflation. Last year net profits jumped 69%, and it is expected to grow annual earnings at a rate of 10% (industry average is 8.5%). Its ADRs ($31.31) have gained 88% since last November, but its shares still trade at just 8x earnings. Investors worry about 50% state ownership, and the possibility the government could enact non-shareholder-friendly policies. "The water market in South America should grow 4% a year, and SBS is one of the best ways to play it."
(6) Sinomem Technology (SINO Singapore): A water treatment provider. It stands to benefit from China's pledged $125B for water treatment and infrastructure in the next five years; the Chinese market is expected to increase by 20% annually. It is still a small player: sales were $51M last year. It trades for S$0.91; Goldman has a S$1.09 target. "John Dickerson of Summit Global recommends that investors buy a basket of Singapore-listed water-related stocks, including Sinomem, Hyflux (HYF Singapore) and Bio-Treat Technology (BIOT Singapore)."