Water is more difficult to pump than crude oil. It is also more difficult to invest.
Water, believe it or not, is denser than crude oil, which makes transportation quite a feat. In fact, while energy is one sector, water is an amalgamation of 17 subsectors, according to Deane Dray, an analyst at RBC Capital Markets, including water treatment, valves, pumps, filtration, desalination, and metering.
Water, for all its importance to life, is also a much smaller business than oil. Dray, who has presented at United Nations water conferences, estimates the size of the global water business at about $655 billion a year, a fraction of the roughly $3 trillion in crude oil consumed worldwide each year. year.
Still, drought, climate change, population growth and a focus on environmental, social and corporate governance investments make water a perpetually intriguing sector for investors. The trick, explains Dray, is investing in water businesses with the best technology and not just interchangeable items.
“The world is awash with basic water products: pipes, pumps and valves,” says Dray. “The emphasis should be on smart water systems.”
But there is also room for water utilities, says Jay Rhame, portfolio manager at
Virtus Reaves Utilities
exchange-traded fund (ticker: UTES), which points to its stability as the main selling point. Annex No. 1:
(YORW), a small utility company in Pennsylvania that has been paying dividends continuously since 1816. Its sequel is believed to be the longest in US history.
With a market capitalization of $620 million, York may not be suitable for all portfolios. The six actions discussed on this page, however, deserve a closer look.
Investors like water utilities for their stability and
(AWK) is as stable as possible. The company is expected to grow earnings at an annual rate of 8% over the next three years, after increasing earnings by 8% per year over the past decade.
This consistency has earned American Water Works a price/earnings ratio of 32 times, in line with its three-year average. It’s not hard to see why. Everyone needs water, and almost everyone pays their water bill. What’s more, utilities can earn a return on pipe fixing and replacement. Rhame says this makes projecting your results relatively easy. The share pays a dividend of 1.7%.
(DHR) is not a pure water company, but it is a technology provider with a strong market position, says Dray, who estimates that 10% of its sales are directly related to water. “I’ve been to water plants on five continents and they all use Danaher water testing systems,” he adds.
Danaher shares trade for about 26 times estimated earnings in 2023, a slight discount from the average of 28 times in recent years. The company is expected to increase profits at an annual rate of about 7% over the next three years, but this may be conservative. Historically, profits have grown at an average annual rate of around 12%.
(WTRG), based in Bryn Mawr, Pennsylvania, is not a pure game – it also supplies natural gas to customers – and that makes it a little less stable than American Water Works. Its historic results are still impressive “It’s a very well-run water utility,” says Rhame,
Essential Utilities’ earnings have grown at an annual rate of 9% over the past decade and are expected to increase just under 8% per year on average over the next three years. Essential Utilities shares are trading for about 27 times expected earnings for the next year, in line with its recent history, though not as high as American Water, given its gas business. Shares have a dividend yield of around 2.3%.
Evoqua Water Technologies
(AQUA) cleans water for more than 38,000 customers in industries such as electronics, manufacturing and even water parks. Stock is not cheap. It trades for 37 times 2023 earnings, a premium over its three-year average of 35. But earnings are expected to grow 15% a year over the next three years, up from 10% in recent years.
Evoqua is also one of the few companies with ways to remove chemicals “forever,” or PFAS, from water, which could be a billion-dollar business if the federal government designates them as hazardous substances. Dray rates the outperforming stocks and has a target of $44 for the stock, up about 15% from recent levels.
Mueller Water Products
Mueller Water Products
(MWA) manufactures fire hydrants and has one of the largest installed bases of iron-gate valves, used to stop the flow of water in water mains or garden hoses, in the US
Mueller’s earnings are cyclical and can go up and down with the economy. Shares tumbled 10% after the company lost fiscal third-quarter earnings in August, a development it blamed on inflation and supply chain pressure. Seaport Global analyst Water Liptak believes the decline is an opportunity.
Earnings are expected to advance by about 13% per year over the next two years. At 17.5 times 2023 earnings, Mueller trades at a slight discount to its three-year P/E of 18.3 times.
Leaking pipes are a big problem. The average age of a water main in the US is approximately 45 years. And Rye Brook, based in NY
(XYL) is here to solve it. If a utility has a leaking water pipe, Xylem can detect and diagnose the problem remotely. About 35% of the company’s sales come from digital products, and that is expected to reach close to 50% by mid-decade, says Alec Lucas, an analyst at ETF provider Global X.
Xylem shares are trading for about 30 times estimated earnings in 2023, well above the
17. But earnings are expected to grow at an annual rate of 25% over the next three years. Digital products, which have better profit margins, help drive earnings growth, says Lucas.
write to Al Root at email@example.com