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The World Will Always Need This Industry

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While everyone frets about the government shutdown and possible debt default and subsequent Mad Max-style Armageddon, I've been thinking about industries that will keep running even in the worst of times.

There's an old adage that grocery stores are a stable business because people always need to eat. But even more than that, people need water -- it's what people, and plants, actually crave. This thought has me coming back around to one of my favorite long-term investment ideas: Consolidated Water (NASDAQ: CWCO  ) .

Big growth prospects
As groundwater aquifers get depleted and climate change dries up other freshwater sources, seawater desalination will become -- pardon the pun -- the wave of the future. The problem for investors is that Consolidated Water is the only desalination pure play at the moment, and so far the company is only focused on the Caribbean, limiting its current growth prospects.

But Consolidated is in the early stages of expanding in other parts of the world. The company recently brought online a plant in Bali, Indonesia, which is a prime tourist area, especially as a rising Chinese middle class starts to travel more in the region. The plant currently produces 250,000  gallons per day and can be expanded to 1.6 million gallons per day as needed. Consolidated claims the region is largely unfamiliar with seawater reverse osmosis technology, and so the plant is currently operating mostly as a proof of concept, with only one major customer so far. But the company has been giving regular tours to decision-makers in the area and is confident in the plant's future success.

Meanwhile, Consolidated 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 Mexico-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 of it from costly Colorado River imports.

But this is still a long way off. The company estimates it will take at least until the second quarter of 2014 to buy the land, secure all the necessary permits, contracts, and so forth before it can actually begin construction of the facility, much less start generating revenue from it. Once it does, however, Consolidated should start seeing massive growth.

Big risks as well
As with most small caps, especially ones operating in emerging markets, there are some risks with Consolidated Water. First, you should generally be wary of companies that list "terrorist activity and perceived threats thereof" as possible business risks. While most of Consolidated's plants are in the relatively stable and affluent Cayman Islands or Bahamas, Bali has been the victim of numerous terrorist attacks over the last decade, some of which targeted tourists. Future attacks could discourage tourism, hurting some of Consolidated's major customers. Similar problems will exist for the Mexican plant.

The Bali plant will only be successful if the company gets more than one client on board. But the Baja plant is an even bigger risk: It has been a huge investment for the company already and it hasn't even started construction. While NSC has signed letters of intent with potential customers, the risk of the whole project falling through is still possible.

Finally, there is always the troop of 800-pound gorillas in the room to consider. While Consolidated may be the only desalination pure play for investors, it is hardly the only business in the industry. General Electric (NYSE: GE  ) and Veolia (NASDAQOTH: VEOEY  ) run their own desalination businesses that dwarf Consolidated's. GE's desalination technology is used in more than 1,500  plants worldwide, producing more than two billion gallons of freshwater daily. And Veolia has built 15% of the entire world's desalination capacity. Both companies are massive conglomerates with deep ties to governments and private businesses through other existing contracts, and likely have the power to muscle Consolidated out of the way.

Closer to its own size, Consolidated also faces competition from Xylem (NYSE: XYL  ) , a spinoff from ITT. Xylem specializes in water treatment and transport solutions, but its treatment business alone is several times larger than Consolidated in terms of revenue.

The Foolish bottom line
People will always need water, and as it becomes a scarcer commodity, desalination will become one of the best methods of slaking the world's thirst. Consolidated Water is in a prime position to benefit from that trend as it generates more capacity in more places and is a company I intend to own for many years.

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Related Tickers

5/26/2016 10:12 AM
CWCO $13.31 Up +0.12 +0.91%
Consolidated Water… CAPS Rating: ****
GE $30.13 Up +0.04 +0.12%
General Electric C… CAPS Rating: ****
VEOEY $22.37 Up +0.39 +1.77%
Veolia Environneme… CAPS Rating: ****
XYL $44.85 Up +0.13 +0.29%
Xylem Inc. CAPS Rating: *****