Money
Morning
submits:
By Larry D. Spears
2010 was the year of the commodity. Gold prices soared, copper
hit record highs, oil again marched towards $100 a barrel, and many
agricultural products doubled in value.
Yet hardly a word was spoken about the world's most precious
commodity - water.
Indeed, few people in the developed world think of water as a
commodity. After all, they can usually get all they want out of the
tap in their kitchen or bathroom. And even fewer think about
water's price - unless, of course, they're buying a bottle at their
local convenience store, where it typically costs twice as much as
gasoline.
But for the rest of the world - and even some areas in the United
States and other developed nations - water represents a significant
problem because of supply shortages, poor quality, or inadequate
distribution and disposal systems. And, thanks to a mushrooming
global population, the water problem is rapidly approaching crisis
proportions.
Consider the following data, compiled by the World Water Council
from a variety of sources, including the United Nations (U.N.), the
World Health Organization, the Pacific Institute and others:
- The world population in the past 50 years more than doubled
to an estimated 6.896 billion at the end of 2010, from just over
3 billion in 1960 - with annual growth rates ranging from 2.2% in
1963 to 1.1% in 2009. At those rates, the human population will
rise to 9 billion by 2025.
- Annual water usage has grown almost twice as fast as the
global population, averaging 2.5% to 3.0% per year - the basis
for a recent estimate by The World Bank that annual water demand
now doubles every 21 years. That pace is likely to increase in
coming decades as development progresses in more countries,
boosting water demand, and creating more pollution to threaten
supplies.
- Roughly 17.5% of the world's existing population - 1.15
billion people - currently lacks access to ready sources of clean
drinking water. More than 2.6 billion live in areas without
adequate sanitation, a major factor in reducing clean-water
availability.
- Although more than 70% of the world's surface is covered by
water, 97.5% of that is undrinkable seawater. Most of the
remaining 2.5% is inaccessible, leaving just 0.1% of global water
readily available for human use and consumption.
- At least 80 countries are already experiencing water
shortages; the U.N. estimates 67% of the world population will be
"water stressed" by 2025.
Though the U.S. is in better shape than much of the world with
respect to water, areas of the desert Southwest and West Coast are
also experiencing increasing difficulties. The California
Department of Water Resources in early 2010 reported that drought
in the state's Central Valley was so severe that farmers had to
bulldoze orchards and artichoke fields for lack of water.
Similarly, Tim Barnett of the Scripps Institution of
Oceanography in a 2008 report estimated there was a 50% chance that
climate change and excess usage could leave Lake Mead - the major
source of water for Las Vegas - "effectively dry by 2021." At that
time, the lake's level stood at 1,108 feet; today it's down to
1,081 feet.
Clearly, water offers a unique opportunity for investors. But be
warned: finding so-called "water pure plays" is surprisingly
difficult.
The Four Elements
Indeed, there are no water futures being traded on the New York
Mercantile Exchange. So water investments are broken into four
major divisions:
-
Water distribution and management -
This includes both water-supply companies and firms involved in
the construction of water plants, pipelines and other
infrastructure. This division appears destined for substantial
growth in the near future. While developing countries will need
new and expanded water-distribution systems, many developed
nations have badly deteriorating infrastructure that will need to
be repaired or replaced.
Some estimates put total investment needs in this segment at more
than $800 billion over the next decade alone. A big chunk of that
will come from China, which two years ago pledged $200 billion to
a 10-year program of water-infrastructure construction and
upgrades.
The U.S. Environmental Protection Agency predicts the United
States will need to spend $277 billion on water infrastructure by
2020 to maintain present standards. That estimate is supported by
the American Society of Civil Engineers ((ASCE)), which says the
United States will require $14 billion a year to repair and
upgrade drinking-water systems, with another $19 billion annually
needed for sanitation systems. Overall, the ASCE said domestic
infrastructure spending needs could reach $1 trillion over the
next two decades.
-
Advanced water treatment
- This industry segment focuses on water quality more than
supply, and includes companies that manage water-treatment plants
as well as those that manufacture systems and equipment used in
the purifying, recycling and reclaiming of water. Given the
changing climate and shifting weather patterns, reclaiming of
wastewater is becoming increasingly important, already accounting
for nearly 400 million gallons of recycled water annually, much
of it for agricultural use.
The water treatment sector also has two subdivisions - reclaiming
of raw materials, such as petroleum products, from polluted
water, and desalination. Desalination, the conversion of seawater
into fresh, drinkable water, is a rapidly growing field,
particularly in arid areas such as the Middle East, where the
bulk of the roughly 8,000 existing desalination plants are
located. In the United States, both Las Vegas and cities in
California and Arizona are either building or considering
desalination plants. Globally, it's estimated that annual
production of desalinated water could reach 14.2 trillion gallons
by 2020.
-
Demand-side efficiency
- This portion of the water industry focuses primarily on
managing water resources, and includes companies that manufacture
"smart meters" for measuring water usage, flow valves and other
distribution-control devices.
-
Food production
- This segment includes companies that manufacture irrigation and
livestock-feeding equipment, develop more drought-resistant crops
and work with farmers to help them reduce their water usage and
better manage land and water resources.
Liquid Investments
Given the global scope of the water problem and the number of
companies focusing on the individual industry segments, there are
no dominant forces in the various fields. However, there are some
leaders with promising prospects. They include:
-
American Water Works Co., Inc. (
AWK
), recent price $26.65
- AWK is a water and wastewater utility company that provides
drinking water, sanitation and other water-related services to
approximately 16 million people in 35 states and two Canadian
provinces. About 90% of its operating revenue comes from
regulated utility operations, which means its income stream is
guaranteed; however, the company is limited in its ability to
raise rates. It has 80 surface-water treatment plants drawing
from 100 lakes, 600 groundwater treatment plants, 1,200 water
wells, 50 wastewater treatment plants and about 49,000 miles of
pipes and mains. It has grown substantially in recent years,
mainly through acquisitions including seven in 2009 alone (six
regulated utilities and one unregulated business). Earnings for
2010 won't be reported for another couple of weeks, but the
estimate for the trailing 12 months is $1.50 per share. An
88-cent dividend provides a yield of 3.3%.
-
Northwest Pipe Co.
(
NWPX
), recent price $23.95
- This is a top choice for those who'd prefer to focus on
distribution and infrastructure. Based in Vancouver, WA, with
plants in several other states, NWPX makes large-diameter steel
pipeline systems for use primarily in high-pressure drinking
water systems, hydroelectric power plants and wastewater
treatment facilities, as well as a broad range of other
structural steel and pipe products marketed throughout North
America. The company lost 17 cents a share in fiscal 2009 due to
a recession-related drop in new construction orders, but it's
projecting a profit for both the fourth quarter and full-year
2010. That could give the stock a boost when the reports come out
in mid-February.
-
Danaher Corp.
(
DHR
), recent price $49.72
- DHR has four major business segments, but the focus for water
investors is its Professional Instrumentation (PI) division. (The
Medical Technologies, Industrial Technologies and Tools and
Components sectors provide added diversification.). The PI
segment supplies analytical instruments and consumable solutions
that detect and measure chemical, physical and microbiological
parameters in drinking water, wastewater, groundwater, oceans and
ultrapure water. The company also makes ultraviolet disinfection
systems and chemical-treatment solutions, as well as analytical
services to address corrosion, scaling and biological growth
problems in boilers, water-cooling systems and industrial
wastewater facilities. It also provides environmental monitoring
and leak-detection systems, vapor-recovery equipment, fuel
dispensers, submersible turbine pumps and remote monitoring
services. DHR's estimated earnings for 2010 are $2.35 a share and
it's also fairly cash rich, with $1.64 billion ($2.50 per share)
in the bank. The stock pays a modest 8-cent dividend.
-
Veolia Environnement S.A.
(
VE
), recent price $31.70
- Founded in 1853, Paris-based Veolia is one of the world's
largest water infrastructure companies. It also has three other
divisions, one of which - Environmental Services - focuses on
wastewater collection, decontamination and recycling, as well as
general sewage processing, waste management and pollution
clean-up. The Energy Services and Transportation divisions
provide added diversification, operating bus and suburban rail
lines and providing management services for airports throughout
Europe. With trailing earnings of $2.10 a share, and a
Price/Earnings (P/E) ratio of 14.88, the stock seems reasonably
priced, and the $1.23 dividend provides a yield of 4.57%.
-
Energy Recovery Inc. (
ERII
), recent price $3.63
- If desalination is the wave of the future in water production,
then ERII will likely be riding the crest of that wave. The
California company designs and manufactures energy-recovery
devices and pumps for use in seawater and brackish water
desalination projects. It markets primarily to original-equipment
makers and builders of small to medium-sized desalination plants
in the Middle East and elsewhere around the globe. The company
lost 5 cents a share over the past 12 months, but analysts
predict a break-even for 2010 and a 2011 profit of up to 10 cents
a share. [
Note:
If you'd prefer a less-focused approach to investing in
desalination, both
The
Dow Chemical Co.
(DOW) and
General Electric Co.
(GE) have growing divisions manufacturing the required equipment
and plant-operating systems.]
-
Itron
Inc.
(ITRI), recent price $62.35
- One of the clear leaders in the demand-side water efficiency
sector, ITRI produces smart water and gas meters, electricity
meters, automated watering systems, electronic water-usage and
data-monitoring devices and ultrasonic water and heat meters, as
well as a variety of other electrical and metering products, all
of which it markets worldwide. Founded in 1977 and based in
Washington state, Itron is expected to report earnings of $4.02 a
share for 2010, up from $2.15 in 2009, with an increase to $4.33
in 2011. The company has a book value of $35.46 a share, but pays
no dividend.
-
Lindsay Corporation
(LNN), recent price $71.29
- Based in Omaha, Neb., Lindsay is a leader in the design and
manufacture of automated central-pivot, lateral and hose-reel
irrigation systems used to increase or stabilize agricultural
crop production while conserving water, energy and labor. It
markets products internationally, including to China. Lindsay
also has an Infrastructure division that supplies transportation
departments and road-construction contractors, making everything
from crash barriers to reflective pavement safety tapes. The
company earned $1.83 a share for the fiscal year ended in August
2010, with $2.19 forecast for FY 2011 and $2.72 for 2012. The
34-cent dividend provides a yield of 0.52%.
-
Companhia
de Saneamento Basico do Estado de Sao Paulo (SBS), recent
price $50.57
- If you'd like an international play as well as a water company,
Brazil's Sabesp fits the bill. It provides water and sewage
services in 365 of the 645 municipalities in the State of Sao
Paulo (which is also a majority stockholder), serving 23.4
million people with water services through 7.2 million water
connections. It also provides sewage services to 19.7 million
people, with 5.6 million sewage connections, and offers other
services including urban rainwater drainage and management, urban
cleaning and solid waste management, power generation and
conservation activities. The company earned $8.05 a share over
the trailing 12 months, giving it a P/E of just 6.23, but the
stock pays no dividend.
If picking one or two individual water-related investments out
of the many available seems too daunting, there are several
exchange-traded funds (ETFs) that can identify opportunities and
provide diversification for you. Two of the top funds are:
-
PowerShares
Global Water Portfolio ETF, (PIO), recent price
$20.30
- PIO is based on the Palisades Global Water Index, which tracks
a group of international companies that provide drinkable water,
water-treatment systems and technology and services directly
related to water consumption. The fund's equal-weighted portfolio
is rebalanced and reconstituted quarterly, with current assets of
$316.2 million. PIO, founded in June 2007, has provided a
three-year total return of -8.15%, reflecting the impact of the
economic slowdown on new water projects, but has yielded 1.36%
over the past 12 months, and the stock is up 28.9% from its
52-week low.
-
Claymore S&P Global Water Index (CGW), recent price
$20.65
- CGW tracks the S&P Global Water Index, which consists of
about 50 stocks traded on major world exchanges and selected
based on the relative importance of the global water industry in
the company's business plan. The index tries to balance
representation from different segments of the water industry - 25
water utilities and infrastructure companies and 25 water
equipment and materials companies. The fund normally invests at
least 90% of its assets in common stock and American depositary
receipts (ADRs) that comprise the Index. The fund, with $206.4
million in assets, reports a year-to-date return of 5.48% and a
yield over the trailing 12 months of 1.03%.
Disclosure:
No positions.
Original post
See also
Political Realities, Nuclear Power and Cleantech:
Stock Prices Influenced by This Debate
on seekingalpha.com