The twin pillars of global population growth and economic
development are leading to concerns about water scarcity.
In the inaugural article of this three-part series, I painted
the issue in broad strokes. Part two delved into the world of
irrigation technology and how outdated and inefficient methods
are slowing being replaced with modern, conservation-oriented
Agriculture and irrigation currently account for a bulk of
water usage and that is unlikely to change (for the better) any
time soon. Over the course of coming decades, natural fresh water
sources will be depleted in various regions across the world, and
the only solution is to invest in efficient, renewable sources of
However, at current spending levels, the world is ill
prepared. In a 2009 report, the United Nations estimated that the
global water infrastructure financing gap (between what is
required and what is currently being spent each year) may be as
high as $85 billion, with over a third of that attributed to
developed Asia and China.
A Salty Problem
Earth's surface is dominated by water, 97% of which is salty. If
even a fraction of that can be converted to drinkable water for
municipal purposes and usable water for agriculture and
industrial applications, then water scarcity becomes a far less
The process of separating clean water from its contaminants,
such as salt and other impurities, is called desalination. The
most basic method is to evaporate the salt water, resulting in
clean water in the form of condensation -- but that is
inefficient on an industrial scale.
Most modern desalination plants use a process called reverse
osmosis, where saltwater is forced at high pressures through a
membrane filter. Salts and pollutants are trapped in the filter,
and pure water passes through.
As of 2013, there were more than 17,000 desalination plants
worldwide, with a total
output of more than 21 billion gallons of pure water.
Membrane-based reverse osmosis desalination has far outpaced its
thermal-based desalination competitor in terms of newly-installed
annual capacity growth.
So why isn't desalination more prevalent in the fight to
combat droughts and water scarcity?
Desalination has a clear drawback: it consumes huge amounts
The companies that can develop the most cost-effective and
energy-efficient desalination solutions should be able to reap
the long-term benefits of large government contracts. In fact,
analysts at market research firm Technavio estimate that the
global water desalination market will grow at a 9% compound
average growth rate from 2014 to 2018.
Let's dive in and see which of these desalination companies
look most promising for shareholders.
Consolidated Water Co. Ltd. (Nasdaq:
CWCO designs, builds, operates and finances reverse osmosis
desalination plants and water distribution systems in the
Caribbean, including seven plants in the Cayman Islands and three
in the Bahamas.
The company focuses on areas with rapid population growth and
high tourism levels, but with little-to-no sources of fresh
water. These factors create urgent demand for drinking water.
Management also aims to expand into new water-strapped
Currently, the company is developing a 100 million
gallon-per-day desalination plant in Rosarito Beach, Mexico,
which will eventually supply fresh water to northern Baja
California, Mexico and San Diego. CWCO may also expand the
capacity of its desalination plant in Bali, Indonesia, a popular
beach resort tourist destination whose existing water supplies
will soon be unable to meet increasing demand.
Consolidated Water's business is divided into three segments:
a retail water segment, which produces and supplies water to
residential, commercial and government end-users; a bulk water
segment that produces and supplies water to government-owned
distributors; and a services segment that provides management and
engineering services for desalination plants.
Shares of Consolidated Water Co. hold clear value: They sport
a 2.3% dividend yield and trade for less than ten times trailing
cash flow. Announcements about future desalination plants will be
a key catalyst to send this stock moving higher.
Tetra Tech, Inc. (Nasdaq:
Tetra provides consulting, engineering and managerial services
for clients that are addressing water, environment, energy and
infrastructure needs. The company is currently building a large
desalination plant in San Antonio, Texas, which is expected to
produce 12 million gallons of drinking water a day.
The company doesn't always serve as a prime contractor. For
example, privately-held IDE Technologies is building a $1
billion, 50 million gallons-per-day desalination plant in
Carlsbad, California (which will supply 7% of San Diego County's
water needs). Tetra designed the conveyance pipeline that will
link the plant to the regional water supply. Tetra Tech also
provided preliminary designs for the plant, as well as agency
coordination services and flow regulation structures.
The company's expertise as a prime contractor, sub-contractor
or technical consultant, sets the stage for rising revenues in
coming years as desalination plants start to cover the global
Energy Recovery, Inc.
Lastly, as energy intensity is a key concern for desalination
plant operators, investors should consider ERII. The company is
providing 144 PX Pressure Exchangers at the desalination plant in
Carlsbad, which will allow the plant to save an estimated 116
million kWh (kilowatt-hours) of energy, or roughly $12 million,
per year, by capturing and harnessing hydraulic energy typically
lost in the high-pressure streams of reverse osmosis.
With a market value of just $140 million, ERII is a micro-cap
stock. But the company appears well-positioned to benefit for the
steady projected growth of desalination. For a deeper look at
this company, you can view my colleague
Andy Obermueller's analysis here
Risks To Consider:
A spike in energy prices would make energy-intensive
desalination plants less feasible, unless companies can develop
further energy-saving technologies. Over the long-term, global
water scarcity issues will compel investments in such
Action To Take -->
With each passing year, desalination technologies benefit from
incremental improvements, and as operational costs fall, demand
for these massive complexes is bound to rise. These companies
represent a spectrum of ways to play the trend, each with a
distinct risk/reward profile.
As I mentioned above,
Andy Obermueller recently recommended ERII to his
But that's not the only game-changer he's been talking about
lately. Andy has written extensively about the profit potential
for Apple's newest technology Apple Pay -- and more importantly
the company's key suppliers. If you haven't heard about this
opportunity yet, then I urge you to check out his comprehensive
report on how to profit from this technology, by