Investments...Tomorrow's Dot Com?
By James K. Glassman
Here's an idea for a great business. The product is something everyone needs -- in fact, after a few days you die if you don't have it. Its uses are nearly unlimited: industrial, recreational, culinary, medicinal. There's a limited supply, and an unceasing demand.
Meanwhile, the industry is dominated by sluggish, bureaucratic players, with run-down facilities, poor marketing and little knowledge of the rudiments of the competitive marketplace.
The business is water -- treating it, purifying it, providing it. We're not talking about designer water in bottles, but the stuff that comes out of the tap or washes sewage down the toilet. In the United States, it is a business that generates more than $80 billion a year in revenue -- four times the sales of Microsoft Corp.
But "business" isn't quite the right word. "About 85 percent of our drinking water, and an even larger percentage of waste water services, are provided by municipal-owned systems that mainly serve local communities," writes John Milner, an analyst for the Value Line Investment Survey.
But these muni utilities have a big problem. The 1996 Safe Drinking Water Act -- plus other federal and state laws -- requires them to renovate their crumbling systems. Many cities don't have the money or the access to capital, so they are turning to profit-making corporations either to run the facilities or to buy them outright and rebuild them.
The irony is that the Europeans are far ahead of us. A French company called Vivendi (which means "living" in Latin) last month announced it would buy United States Filter Corp., which both runs water plants and provides water engineering for other utilities. That will make Vivendi, whose American depositary receipts (similar to normal shares of stock) trade on the New York Stock Exchange under the symbol VVDIY, the largest water company in the world, with 75 million customers.
Vivendi is a great company, and it looks like it's getting a great deal in USFilter, paying $31.50 per share for a company that traded as high as $43.75 in 1997.
Vivendi began life in 1853 as a limited partnership called Compagnie Generale des Eaux (General Water Company), with investors that included the Rothschild family. It soon became a wildly diversified conglomerate with interests in waste incineration, publishing, Internet services, real estate, amusement parks and railroads.
In 1996, Jean-Marie Messier took over as CEO, changed the firm's name and began concentrating on telecommunications, waste treatment and water. Earlier in the decade, the company had expanded into Latin America and Asia, but Messier drew a bead on the United States, which has only just begun to privatize water. Investors responded enthusiastically, bidding the price of Vivendi's stock up from $17 in October 1996 to $58 in January 1999.
France is also home to the world's second-largest water company, Suez Lyonnaise des Eaux, formed through a 1997 merger between the company that built the Suez Canal (and then became a bank) and a water company with operations in the United States, Australia, Russia, Brazil, Spain and more.
Suez, which trades on the Paris Bourse under the ticker symbol LY, is a favorite of David Marcus, co-manager of Franklin Mutual Discovery (1-800-342-5236), one of the Mutual Series funds that used to be run by Michael Price, the bargain hunter.
In fact, the Mutual Series funds -- including Mutual Shares, Beacon and Europe -- owned, at last count, about 3 percent of Suez's shares, making them, in the aggregate, one of the firm's top five stockholders.
Suez has "tripled our money, and it's still cheap," Marcus said during an interview in New York recently. What excites him is that Suez, like Vivendi and several other unwieldy European conglomerates, is finally adopting American methods, sharpening its focus and aiming to benefit shareholders, not just managers.
So it's not just the water business. It's the idea that Suez, under its highly regarded chairman, Gerard Mestrallet, is learning to make profits, rather than just employing people. In this endeavor, it has a lot in common with other companies in which Discovery has put its shareholders' money.
One of those is Investor AB, the Stockholm-based firm controlled by the Wallenberg family, with large stakes in such Swedish companies as LM Ericsson AB, the electronics giant; Saab AB, aerospace; and SKF AB, the world's largest ball-bearing maker.
Another is Montedison S.p.A. (whose ADRs trade under the symbol MNT), an Italian company with interests ranging from electricity and chemicals to beets and margarine. And then there's Compagnie Financiere Richemont AG, a Swiss firm with holdings in tobacco, luxury goods and the direct-marketing business (the ADRs' symbol is RCHMY).
These companies could still have a long way to go before they reach U.S. levels of efficiency and profitability. But Marcus is convinced they are getting there. He believes Europe is loaded with bargains -- wonderful firms that have become encrusted with barnacles, just now being scrubbed off, the way they were here starting in the early 1980s. And in some fields -- such as utilities -- Europe is ahead of this country in using private ownership to get the best results. Still, any water company has to bear some regulation. It's not a completely free market.
In the United States, the leading water company is American Water Works Co. (AWK), which pays a 3 percent dividend that has been growing at a rate of 10 percent annually, but its revenue is less than one-tenth that of Vivendi's. The stock has fallen 14 percent this year.
As for the European stocks: Investor AB does not trade on a U.S. market. Its shares in Sweden doubled in the two years ending August 1998 but have since fallen 20 percent. Montedison also peaked last summer and has dropped by about one-fourth. Richemont, by contrast, has risen 60 percent in the past seven months. And Suez has zoomed from 1.30 euros to 4.07 euros in 2 1/2 years.
Making sense of European stocks -- especially complicated conglomerates -- is not easy, so the best approach for small investors is to find a fund manager like Marcus, who appreciates the managerial revolution.
Mutual Discovery, with a five-star (top) rating from Morningstar, is a "global" fund, meaning that it invests in domestic as well as foreign shares. Last year, the fund lost 2 percent in value, but that's not bad compared with its peers. Over the past five years, it has averaged returns of 15 percent annually, with a risk rating that puts it in the top 1 percent of its category.
Right now, U.S. stocks represent only about one-third
of the fund's assets. In fact, Discovery's number one holding is U.S. Industries Inc.
(USI), which makes a variety of consumer and industrial products -- including Eljer
toilets and Jacuzzi whirlpools. It's hard to get away from water.
© Copyright 1999 The Washington Post Company