There isn't a single locality in California that isn't suffering from some level of drought. That's had an impact on industries as far ranging as electric utilities and farming. There are some things that can be done to help alleviate the pain, however, and it highlights potential investment opportunities.
Use less water!
It would be nice if the drought in California were simply a matter of using less water. But the sad fact is that the problem stems from a lack of rain. There's little that humans can do about that. However, that doesn't mean ignoring consumption is the answer, either.
For example, the Pacific Institute recently put out a research report that said conservation efforts could result in water savings of 30% from the residential sector and as much as 70% from the farm sector. Those are huge savings and some of the suggested steps are relatively easy, like farms shifting to more efficient irrigation techniques.
That is where water utilities come in. California Water Service (NYSE:CWT) serves around 470,000 customers in more than 80 California communities. It's been encouraging customers to conserve water. But that isn't a new phenomena, California Water has been asking customers to reduce their water use for years. It's spent over $30 million to cut consumption of the very product it sells. Although it hasn't achieved the 30% mark, California Water claims water use has fallen, "...15% throughout the company's service territories since 2007."
How do you help customers use less water? You make sure the right tools are available, like water meters from Badger Meter (NYSE:BMI) and Itron (NASDAQ:ITRI). Itron estimates that only 50% or so of U.S. households have smart meters installed. So only half the country has the tools it needs to combat utility usage. And according to the San Jose Mercury News, there are hundreds of thousands of California homes and businesses without smart water meters.
Itron's water business made up 28% of its revenues in 2013 (electricity accounted for 43% and gas 29%). Water is a much bigger contributor at Badger Meter, where municipal water meter sales made up nearly 70% of the company's top line in 2013. Industrial water meters accounted for 27% with "specialty" products accounting for the rest.
Helping customers better track their own use is an important step in the process of conserving water. While that helps offset the impact of droughts, it does little to stop them. While we still don't know how to make it rain, we do know how to turn non-potable water into drinking water.
On that front, Consolidated Water (NASDAQ:CWCO) is an expert. The company uses reverse osmosis desalination to turn seawater, which makes up 97% of the world's water, into drinkable water. Consolidated's expertise comes from operating 13 desalination plants in the Caribbean.
It also has two projects on tap that could materially alter its business. One in Asia and the other in Mexico. The Rosarito, Mexico, project is expected to provide water to Tijuana and San Diego. While there may be a shortage of rain, there's no shortage of seawater. If Consolidated can prove its technology in, or at least near, the United States, there could be expansion opportunities driven by California's current water shortfalls.
The bright side?
The drought in California is a dramatic reminder that we can only control just so much in the world. However, as an investor, you need to look to the future. Human ingenuity has time and again dealt with uncontrollable nature. Badger and Itron are two companies that can help us do a better job of controlling the water we use, while Consolidated actually makes water we can use out of the plentiful supplies of water we now can't use. The drought is horrible, but you might find investing in the solution is a good idea.