Do Drink the Water

Seems kinda strange, doesn't it? A happy story involving tourism in the tropics and local drinking water? Well, that's part of the gig for Consolidated Water (Nasdaq: CWCO  ) -- supplying fresh water for tourist-heavy areas of the Caribbean, ensuring that guests spend their time praying to the golfing gods, not the porcelain gods.

There's plenty of tropical heat in the financial performance as well. Revenue was up nearly 53%, as retail water sales jumped more than 61% and bulk water sales rose 39%. In the case of the former, there's been a strong post-hurricane recovery in the Grand Caymans -- so much so that the company is mulling additional capacity-expansion efforts.

The company also produced considerably better profitability this quarter. Gross margins improved by more than twelve-and-a-half points, and operating income soared 172%. That's the great part about this business: Once the plants and pipes are in place, the more water you put through them, the more money you make.

So what's not to like? Well, the company is still targeting some pretty hefty construction projects. That, in turn, will likely mean more debt, more risks, and perhaps more operating challenges as well. That's not too big a worry for me -- I'd rather see the company win the bids and continue to expand the business.

Valuation is a bigger concern; it's just plain loopy among water companies these days. Providers like Aqua America (NYSE: WTR  ) and American States Water (NYSE: AWR  ) don't seem cheap, and neither do the filtration and pump companies. But Consolidated has what a lot of investors love most of all, and will pay almost anything to get: growth.

This isn't the stock for me, but maybe some of you go-go-growth types see more value here.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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