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Water Could Quench Investors' Thirst in 2014

Without food, you'll die in a week or so. Without water, you'll die in a couple of days. The only thing more vital to survival is air—which you can do without for only a few minutes. But 97% of the world's water is seawater filled with salt. And of the remaining 3% that is potentially drinkable, much is frozen in the polar caps or is dirty. Controlling access to water is a big business that will only get bigger as the world's population expands.

Safe and predictable
You probably don't think about water much in the United States. Aside from the occasional nuisance of a drought, we have plenty of drinkable water and a reliable infrastructure for delivering it. The pipes that bring water into your home, however, are owned by someone. And you may not know it, but some of those pipes are pretty old.

That's the dual opportunity the U.S. water market offers investors. Water utilities like Aqua America (NYSE: WTR  ) and American Water Works (NYSE: AWK  ) are big domestic players with solid, if slow growth, prospects. Aqua, for example, is an expert on the acquisition front, integrating over 200 water utilities over the past decade. As municipalities try to conserve cash, look for Aqua to keep up that pace.

American Water Works, meanwhile, stresses the built-in growth potential of capital spending to fix aging pipes. And since water is something we can't live without, regulators have been very willing to allow higher rates when companies like Aqua and American Water spend. How big is the potential? American Water estimates that nearly 45% of the country's pipes will be in disrepair by 2020 if the issue isn't addressed.

What about the rest of the world?
Consolidated Water (NASDAQ: CWCO  ) , meanwhile, is taking a very different approach. The company uses reverse osmosis desalination plants to make seawater potable. It's a tiny company, with a market cap of just $200 million or so, but there's big potential for growth since many nations around the world have limited access to fresh water.

Today Consolidated operates 13 water desalination facilities in the Caribbean. However, it's working on projects in Asia and Mexico. These deals could make this niche player into an increasingly important global water company. And its around 2.2% yield isn't too far behind more stable Aqua (2.6%) and American Water (2.7%).

Water for business
There's another way to touch on clean water—filtration. Pall Corp. (NYSE: PLL  ) is a longtime player here. It's a supplier of filtration, separation, and purification technologies to industries as diverse as medical research and soda manufacturers. The filters it sells remove solid, liquid, and gaseous contaminants from liquids and gases. Not exactly a "water" company, but vital to the process of using water.

The interesting thing about Pall's business is that filters have to be replaced on a regular basis. In fact, 90% of its business is recurring in nature. The shares have run up notably over the past year, so now probably isn't the best time to buy. However, it's a water related company to keep on your watch list for a pullback.

Although the top line has been stuck in neutral for a few years, Pall is focusing on long-term growth. For example, the company has purchased three companies in the last two years. And it has notable potential in the medical industry, which will be increasingly important as the world's baby boomers age.

This drink's on me
It would be hard to underestimate the importance of clean water. However, how you make money off of it can be a little trickier. If you are conservative, stick with water utilities like Aqua and American Water Works. If you are a bit more aggressive take a look at Consolidated Water's desalination operations—there's huge potential. And watch Pall for a pullback since it's business is supported by loyal customers who can't do without its water filtration products.  

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  • Report this Comment On January 17, 2014, at 11:14 PM, energeticfool2 wrote:

    WTR is already at FairValue if you believe that current growth rates will continue. (I determined at using my iPad FairValue with Market Impact App). So unless you believe in greater than 15% growth on WTR, you better pass on it. Or play some short term momentum.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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