Water Industry News
Hot water company
Savvy investors, including
small-cap maven Chuck Royce, Fidelity Contrafund manager
William Danoff, and hedge-fund manager Stanley Druckenmiller,
have been accumulating water stocks for months. Water? That's
right, good old H2O, a gallon of which sells for more than an
equal amount of gasoline, as some analysts who follow the
sector are fond of noting.
A confluence of trends has led
to increased interest in companies that make water treatment
and filtration equipment, build water infrastructure such as
pipelines and sewage treatment plants, or run water utilities.
The several dozen stocks in the sector had a terrific run last
year but have sold off in the first quarter, offering a more
attractive entry point for long-term investors.
Spending on various water projects will be huge. The
Environmental Protection Agency estimates it will cost $500
billion over the next 20 years to maintain the country's water
networks. The agency is also cracking down on cities with
water pollution problems, such as Atlanta, Cincinnati, and San
Diego, and forcing them to upgrade their facilities. Clean
water is an even bigger problem in China, where the government
is building treatment plants. The damage caused by December's
tsunami will require the rebuilding of water infrastructure
across other parts of Asia as well.
The best investment strategy is to diversify among several
kinds of water companies. Both Danoff and Drunkenmiller own
CUNO, which makes filters out of everything from glass and
ceramics to cellulose. Such filters are used under kitchen
sinks and in wineries and pharmaceutical companies. Record new
orders came in during its Jan. 31 quarter, and the company is
forecasting a 15% rise in earnings this year.
Danoff and Drunkenmiller have also bought Pentair, which gets
two-thirds of its revenue from pump and filter sales and is
projecting 45% growth in earnings per share for 2005. And they
both added Nalco Holding, a leading provider of
water-treatment chemicals that went public in November. The
company is paying down debt, and expects to increase cash flow
at double-digit rates. Analysts who follow the sector note
that defense contractor ITT Industries gets about 38% of its
revenues and 45% of its operating income from its
For value investors looking for less pristine companies, one
of Royce's holdings, Insituform Technologies, is out of favor
because of an ill-fated foray into tunnel construction. Now
the company is benefiting from a growing number of
sewer-repair projects, says Debra Coy of Stanford Washington
Research Group. Similarly, Tetra Tech is refocusing on water
projects after getting into trouble building
cellular-telephone towers. Last month the company announced a
$50 million loss, but Coy thinks that's the end of those woes.
"They're coming back to the core things they do
well," says Coy. "Earnings will recover this
year." Calgon Carbon, a Royce holding which makes
ultraviolet purification systems, is reorganizing, taking a
write-off, and expects to achieve a 29% gain in operating
income this year.
Some investors are looking at water utilities, too, since they
don't face the same deregulatory pressures that affect power
companies. "You can't deregulate water unless you figure
out how to beam it from place to place," notes David
Schanzer at Janney Montgomery Scott.
The biggest publicly traded water utility is Aqua America,
formerly known as Philadelphia Suburban but now operating in
13 states as far away as Texas and Missouri. Utilities
typically don't grow much faster than the overall economy, but
Aqua has been an active acquirer, buying 111 companies over
the past five years. The company hiked its dividend 8% last
year, the 14th increase in 13 years.
Investors buying now may have missed out on some of the run up
in water-related equities. But the world's unquenchable thirst
suggests that these stocks won't be running dry anytime soon.