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Investing in Water Companies

Written By Nick Hodge

Posted October 29, 2008

I’m going to tell you something I told readers of the Alternative Energy Speculator this morning.

I’m feeling good about water.

Specifically, I’m feeling good about investing in water companies.

I’ve actually been bullish on water for quite a while now. And so was the broader market.

Earlier this year, we saw some specialized companies in the water sector climb to all-time highs.

Lindsay Corporation, which I’ve written about before in these pages, climbed from under $50.00 per share to over $130.00 per share from November 2007 to May of this year.

Badger Meter (NYSE: BMI) flew from under $40.00 to $62.00—a 55% surge—in just two months this spring.

And there are plenty more examples of water companies’ previous success.

As the year progressed, water stocks sold off along with the broader markets.

Take a look at this chart that tracks the performance of four major water ETFs against the performance of the DOW so far this year:

water etfs versus the dow

Granted, some companies in the sector were probably overvalued, had risks on their balance sheet, or faced illiquidity in the face of the credit crunch, and deserved to be knocked down a few pegs.

This is certainly what brought down the ETFs that track the net asset values of water companies.

But in the rampant selling, some stocks got taken down undeservedly, and still actually boast appealing fundamentals, which seem to have been thrown out the window in recent months.

Investing in Water Companies

That said, there are some water stocks floating around out there certainly worthy of attention from savvy investors.

I’d have to start with Flowserve Corp. (NYSE: FLS), which actually reported earnings last night.

Here we have a stalwart water service company that develops, manufactures, and sells a variety of valves, pumps, and related equipment for the water and other industrial sectors.

Their release of third quarter earnings recently stunned the street.

Earnings per share came in at $2.04, much higher than the analyst-predicted $1.76, and 86% higher than earnings in the third quarter last year.

Flowserve traded as high as $145.00 earlier this year, but now trades in the $55.00 range.

And here’s the kicker.

Flowserve currently trades at a price-to-earnings ratio of 8.55. That’s the current share price divided by full year 2007 earnings.

Unlike other companies that have reported earnings in recent days, Flowserve actually stuck to its earnings forecast for 2008.

Most other companies have trimmed their outlooks in light of current economic conditions that are all but certain to reduce sales.

The company is still predicting that 2008 earnings will come in at the $7.50 mark.

That would give the company a forward price-to-earnings ratio of just 7.33, rendering it utterly oversold.

You see, consumers will tighten their belts to get through these tough times. Less going out to dinner. Less purchasing of discretionary items. Perhaps even driving less to curb fuel costs.

But they won’t use less water.

And there are a lot of other companies out there that will benefit from this situation as Flowserve will.

I’ll be covering those companies for readers of the Alternative Energy Speculator.

Now though, I’d like to turn to some recent water industry news that underscores my bull sentiment for the sector.

Water Investment Related News

In an effort to get a better grasp of how the water industry is weathering the financial storm, and to provide some evidence of recent water news in context, consider the following headlines, all of which came out during the past month, in the heart of the financial meltdown:

  • Desalination Expected in U.S. Water Future

  • Abu Dhabi ready for major water and power projects

  • Cecilton water plant almost ready to open

  • GEFA Approves $15 Million in Loans and Grants to Finance Water and Sewer Infrastructure Improvements

  • Arsenic-tainted water in China sickens 450

  • Eastern Ky. town calls on residents to conserve water

  • Officials say wet winter crucial to Reno water

That’s a fairly eclectic mix headlines, representing both the financial situation and the crisis implications that currently surround the water industry.

We’ve already seen the government step in to aid failing banks and insurance companies. Now their on verge of cleaning up Detroit’s mess as well.

These were additional measures. Government assistance beyond business as usual.

But the business as usual projects—the vital ones, at least—will continue to receive funding from the government as well as from the private sectors.

While some industries are finding it tough to get credit, you can bet the credit pipe will remain open so that citizens are able to get one of their most vital needs.

The headlines above are just a snapshot. But they are replicated everyday. If a new water plant is announced in Cecilton today, another one will be announced in Springfield tomorrow.

Same holds true on the finance side. $15 million in Georgia grants for water and sewer infrastructure today. . . a $20 million announcement in California tomorrow.

And that doesn’t include the dozen grim water stories that break everyday. Arsenic in China. . . a dependence on a wet winter in Reno.

Just this week, the U.K. Environment Agency called on water companies to step up their spending on infrastructure maintenance in an attempt to cut pollution, and increase their efforts to reduce demand for water and use their resources more efficiently.

CNN recently ran a feature entitled, "Thirsty World: Desperate Quest for Water" that chronicled critical water shortage across the globe.

This problem isn’t going away. And it’s looking like the investment to solve it isn’t either.

With the recent sell-off, now is the perfect time to establish a safe long-term position in the water industry.

That kind of investment will surely provide stable returns as the market begins to ascend.

Start by checking out Flowserve and some of the water-related ETFs.

Be sure to check out Alternative Energy Speculator for continued profitable research and recommendations in the water sector.

Call it like you see it,

nick hodge