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Water Industry News

DECEMBER 26, 2005

2006 INVESTMENT OUTLOOK -- THE BEST PLAYS

WATER WORLD

The truly glistening infrastructure plays might be in water, says Daniel Boone, portfolio manager for the Calvert Social Investment Fund. He cites the number of conglomerates that have been bolstering their exposure to water-related businesses. "When you see savvy companies like General Electric buying into this business, you know they're on to something," he says. One of Boone's favorite water plays is Pentair Inc., a Golden Valley,  Minn., industrial company that now derives 80% of its revenues from water-related systems. These range from water pumps used to clear floodwater out of New Orleans, to filtration and purification systems used by everyone from municipal water providers to Starbucks Corp, which wants to ensure that its lattes and frappuccinos taste the same around the country. Boone says Pentair is usually pricey, but that a pullback in the stock since July from 45 to 37 provides a buying opportunity.

Another company that seems flush: Insituform Technologies Inc,. a Chesterfield, Mo. company that makes equipment for rehabilitating municipal sewers and water mains. John Quealy, an analyst with Adams Harkness & Hill Inc., a Boston brokerage, says that as municipalities face up to the expensive task of repairing their aging sewer systems -- an endeavor that will cost the city of Atlanta as much as $3 billion over the next 12 years -- they'll flock to Insituform's cost-efficient services. Among them: a proprietary system for relining, rather than replacing, existing pipes using flexible, jointless tubes made out of resin and other materials. "It's like a catheter or stent for a sewer pipe. It becomes a pipe-within-a-pipe," says Quealy.

Boone, the Calvert fund manager, also likes FMC Technologies Inc., a Houston company that makes equipment for oil and gas drillers. Boone notes that despite the heavy damage suffered by the oil and gas rigs off the Gulf of Mexico from this year's hurricanes, there was no environmental damage. Many of the rigs were fortified with FMC's "subsea trees" -- essentially, pipes that connect a drilling platform on the surface to the well below. Drillers swear by the pipes because they have the ability to separate oil and natural gas from water and sand down at the sea floor -- sending only fuel to the surface -- and because the pipes are rugged enough to withstand pressure of 15,000 pounds per square inch from storms. "We didn't have any spills from Katrina that contaminated the water," notes Boone. He says oil and gas exploration in the Gulf should increase in coming years -- and that augurs well for FMC. Analysts expect the company to increase its earnings by close to 20% annually over the next five years.

By Dean Foust