This Company Is Turning the Tide

In a recent article, I highlighted the growth opportunities in certain water-related companies. When most people think of investing in water, they think of water utilities, which are tightly regulated and hard to make money on. The companies I highlighted get around that problem by providing the infrastructure and purification treatment water utilities need to deliver water to their customers.

I noted that one company, Consolidated Water (NASDAQ: CWCO  ) , was the only publicly traded desalination company, and thus had a lot to gain as freshwater supplies dwindle, but that it is focused on just the Caribbean area, which limits its growth opportunities. However, two readers pointed out that while Consolidated Water currently just focuses on the Caribbean, it is in the early stages of expanding into more global markets, prompting me to take a deeper look at the company. Read on to learn why I now believe this company has a bright future, and am making a CAPScall today to take advantage.

Water, water everywhere
About 70% of the planet is covered in water, but almost none of it is immediately drinkable. An estimated 97.5% of the world's water is saltwater, and more than half  the world's population lives near the sea. That kind of population density puts an enormous strain on local freshwater supplies, and makes entire cities sympathetic to the plight of Coleridge's ancient mariner, who, stranded on a ship in the ocean, was dying of thirst while surrounded by water.

Desalination plants can help turn the tide against dwindling water supplies. Consolidated Water uses a process called reverse osmosis, which can be thought of as a high-tech version of a Brita filter, and is able to convert about 40%  of the seawater input into water that is safe to drink.

A drop in the bucket
Consolidated Water is the only desalination pure-play available to investors, but it is not the only desalination company out there. In fact, Consolidated is a small drop in a big global bucket, with competition from the likes of General Electric (NYSE: GE  ) and Veolia (NYSE: VE  ) .

Consolidated's size is both an advantage and a disadvantage. General Electric's water business is such a small part of the overall company that it could probably double without investors noticing. At the same time, it already has its foot in the door with dozens of other government contracts all over the world, and could easily shoulder Consolidated Water out of the way as it tries to tap new markets.

The rising tide
That said, Consolidated is still carefully pursuing new opportunities. Currently, it operates 14 plants in a handful of Caribbean countries, producing about 26.8  million gallons of water per day (mgpd). However, it also holds a majority ownership of NSC Agua, a Mexican company, which is in the development stages of constructing a 100-mgpd  plant near the Mexican-California border, which would provide water to Baja California and southern California. Once operational, the plant will be a huge boon to Consolidated, as that region currently has few freshwater supplies and has to get the majority from costly imports.

Consolidated is also in the process  of building a plant in Bali, Indonesia, a prime tourist area. This highlights another advantage and disadvantage of the company. It largely sticks to tourist areas when building new plants, as these tend to have much higher water demands than typical residential areas. The flip side is that when the global economy is bad and tourism declines, so does Consolidated's revenue.

However, Consolidated is focusing a lot of its expansion on Asia, which should continue to see growth regardless of the global economy. As the Chinese middle class grows, outbound tourism is growing rapidly, leading to increased traffic to nearby destinations, many of which are island based and lack natural freshwater supplies. Consolidated can draw from its experience in the Caribbean to bring desalination to these areas.

The Foolish bottom line
This is not the safest company to invest in. You should generally be wary of companies that list "terrorist activity and perceived threats thereof" as possible business risks. By focusing most of its attention on tourist spots in emerging markets, Consolidated runs a cyclical business in questionably stable regions. However, these same regions are expected to see significant increases in water use over the next few decades, and Consolidated offers them one of the best solutions to that problem. It may take time for the company's expansion to take off, but I'm making an outperform CAPScall today to take advantage when it does.

If you're not quite sold on Consolidated Water, add it to My Watchlist to keep an eye on its expansion.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2013, at 4:42 AM, yes2everything wrote:

    Thank you for this. It hadn't occurred to me that water in the non utility sense may be an emerging sector in its infancy.

  • Report this Comment On January 17, 2013, at 5:08 PM, DAG1996MF wrote:

    If you like the water theme (it's one of my favorites), you might also want to take a look at XYL (an ITT spinoff from 2011). I don't own XYL yet, but plan to and am also plan to continue adding to my CWCO holdings as the company's positioning continues to improve.

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