People want gold and oil. These commodities have long been
synonymous with wealth.
But they need water. It's something every one of the world's
seven billion-plus inhabitants needs every day for basic
In the not too distant future, the wealth of some nations could
be measured more by water than crude.
Drought-ravaged regions around the world are wrestling overwater
rights , rationing and other suchissues .
Few people realize it, but drinking, bathing and other
residential uses account for only about a tenth of all water
consumption. Industrial applications use twice as much. And a
whopping 70% of consumption is channeled toward agricultural uses.
It takes 1,000 tons of water to produce just one ton of
There isn't always enough to go around, and water resource
management is becoming a majorissue -- one that spells opportunity
Consolidated Water Company (Nasdaq: CWCO)
has a tight grip on water distribution throughout half a dozen
Caribbean nations. The company was granted its first public utility
license in 1979 to serve residential and commercial customers in
the Cayman Islands. In the past decade, a series of acquisitions
has expanded the base of operations from Belize to Bermuda.
In the Bahamas, Consolidated Water owns and operates a massive
desalination complex with the capacity to produce 12 million
gallons of pure drinking water per day. The company also has a
stake in an affiliate that supplies water to the governments of
Tortola and Jost Van Dyke in the British Virgin Islands.
Combined, the firm manages 14 desalination plants throughout the
region that pipe 26.8 million gallons of clean water each day to
homes, businesses, resorts and government-owned utilities.
Consolidated Water is one of the world's most experienced
practitioners of seawater reverse osmosis technology. In comparison
to the traditional thermal distillation process, seawater reverse
osmosis is a radically different way to extract salt.
The process removes salt from water by pressurizing saltwater
and then passing it through a special filter that doesn't let the
The end result is the same. But seawater reverse osmosis is
preferable from aninvestment standpoint over distillation, because
the process is more energy efficient, which means lower costs (and
wider profits) for every gallon of water produced.
Consolidated Water doesn't spend too much time worrying about
demand or searching for new customers. Why would you, when you're
the only one selling a product that everybody is buying?
As with other public utilities, Consolidated Water enjoys
amonopoly throughout most of its territory. The company supplies
100% of the potable water in the Cayman Islands, where it has four
water sale agreements that cover more than 10 million gallons per
day. The same is true on the resort island of Ambergris Cay off the
coast of Belize -- it's the only game in town.
Procuring the necessary raw materials to turn seawater into
fresh water isn't a problem. And higher energy costs aren't a
concern either. Aside from base pricing, the firm's franchise
agreements and supply contracts allow for upward monthly
adjustments to pass along rising manufacturing costs.
In the past five years, Consolidated Water has been collecting
approximately $55 million in annualrevenue . About 40% of the
proceeds come from retail customers, while larger bulk accounts
represent the remaining 60%.
Through the first nine months of 2012,
revenue is tracking 17% ahead of last year's pace. Gross
profits are up 14% to $16.6 million.
That growing income stream is putting morecash in stockholders'
pockets. The company is currently dishing out quarterly payments of
7.5 cents per share, for an annual distribution of 30 cents. At
today's prices, thestock is throwing off a tidy 3.8%yield .
And there is enough left over to support businesses development
activities in the thirsty Baja California Peninsula in western
Mexico. Looking ahead, the company is also exploring potential
markets in southeast Asia. These expansions should help drive cash
flows (and dividends) higher down the line.
Now, there is noguarantee that the company's franchise licenses
or water supply agreementswill be renewed in the future.
But steady water salesvolume and contractual pass-through rate
hikes should make for highly visible and predictable cash flows.
And the penetration of new markets should keep distributions
growing in the future.
Action to Take -->
I think this undervalued stock could hit $9 a share in the coming
year, which added to the 4% yield could give investors a total
return of more than 20%. That's an attractive proposition in this