The Last Drop
The EPA has projected the total capital needs for wastewater infrastructure to be $17 billion to $23 billion a year, up from the $13 billion a year spent now.
And this is not a U.S.-specific problem: The World Commission on Water has estimated annual investment needs in water infrastructure to increase from $75 billion to $180 billion over the next 20 years.
The desalination industry is one key to water shortages; the industry could be a $20 billion industry within five years, with almost three quarters of that in the Middle East. Texas and California have large desalination plants coming online. In Carlsbad, Calif., a planned desalination plant will be the largest in the world.
Pentair, General Electric (GE:NYSE) , Siemens (SI:NYSE ADR) , Danaher (DHR:NYSE) and ITT Industries (ITT:NYSE) have done a great job of buying up water-related companies. GE's acquisition of Ionics gave it the best pure play in desalination.
A basket of water stocks has outperformed the S&P 500 for the last 10 years, but there is still money to be made in all of this. Why? Current forecasts underestimate the amount of money that is going to be spent to upgrade this sector.
Turning Water Into CashPentair is the best pure play in the water sector: 73%-75% of its revenue comes from water. Pentair's main focus is pumps, filtration and purification. The U.S. will have to almost triple spending to update its entire infrastructure and filtration plants; this is not baked into the price of PNR. We have a growth that will explode in the same way the oil industry has seen, the key is to pick the right company, and Pentair is the right company.
Pentair has made several acquisitions to become a major player in the water sector, with the most notable being its $750 million acquisition of Wicor.
In the first quarter of 2005, Pentair's water revenues were $512 million, up 63% year over year. Pentair is benefiting from the Wicor acquisition and growth in North America and China.
Pentair is more than 20% off of its 52-week high of $46.47. It has a forward multiple of roughly 18 based on consensus estimates of $2.20. Put a more realistic 21 multiple on this stock, and you have it reaching its 52-week high again. That is a 20%-plus gain.
I do not currently own shares of Pentair; however, I have set aside 5% to 10% of my portfolio this year for water stocks, and Pentair will most likely be the first.
There are other ways to play the coming water boom. Insituform Technologies is a fantastic company with a great product. It has the ability to fix pipe while still in the ground. The only problem is this company's price is way too far ahead of itself. It may look cheap at less than $20 per share, but not when you look at its trailing P/E of more than 220.
A former All-American offensive lineman at Abilene Christian University, John Layfield played professional football for the then-Los Angeles Raiders and later in the World League. After wrestling in Japan, Mexico and Europe, Layfield arrived in the WWE in the mid-1990's. A former WWE champion, JBL was a featured wrester at WrestleMania 21 and can also be seen on Friday Night SmackDown! on UPN.