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By Laura Cohn
The world is facing a growing shortage of fresh water. In fact, dwindling supplies of this most natural of resources are making water nearly as hard to find as oil. That means companies involved in selling, purifying or facilitating the transport of water should be good investments as the world grapples with reduced flows of the wet stuff.
Shares of water-related companies have bucked the tide during the market downturn. Over the past year to September 8, PowerShares Water Resources, an exchange-traded fund, broke even, while Standard & PoorÕs 500-stock index sank 14%. Some water stocks have performed remarkably well. Shares of Northwest Pipe -- which, not surprisingly, makes pipes for water infrastructure and other purposes -- have jumped 49% over the past year. Shares of American Water Works, a utility, have risen 3% since the company went public in April, outshining the S&P 500 by 13 percentage points.
If you want to swim in the world of water, you have a choice of pools. You could buy shares of companies that make equipment for utilities, purification programs and other water-related projects. Also worth a look are companies that will replace the nation's aging pipes and provide new ones for transporting water to growing population centers. In addition, water utilities offer generous dividends and provide steady growth that could accelerate as demand increases and state regulators approve rate hikes. Meanwhile, companies in the U.S. and in places with burgeoning populations and desert environments are investing in desalination plants, which purify seawater by extracting salt and other minerals.
Water, water everywhere. The purest water plays are, of course, water utilities. American Water works (symbol AWK), which went public in the spring after German utility RWE spun off 36% of its interest, is the nation's largest investor-owned water utility, with more than 15 million customers in 32 states and Canada. It also manages the largest desalination operation in the U.S., in Tampa. The stock, at $21 in early September, trades at 15 times estimated 2009 profits of $1.40 per share and yields 3.7%.
Some 2.8 million customers in 13 states, most of them east of the Mississippi, are served by Aqua America (WTR). Its shares, recently $17, have sunk 27% this year, but bulls think they could recover if the company wins rate hikes in Florida and North Carolina next year. On av-erage, analysts see earnings growing 16% in 2009, well above the industry norm of 10%. The stock trades at 20 times estimated '09 earnings of 85 cents a share and yields 3.0%.
The second-largest water utility, California Water Service Group (CWT), serves four western states and two million customers. It's the top pick of Hilliard Lyons analyst James Lykins, who says changes in California's regulatory climate are "constructive" and create "fair rate-making mechanisms." He sees the stock, recently $38, climbing to $44 within a year. The company has raised its dividend every year for 41 years running. The stock trades at 19 times estimated '09 earnings of $1.99 per share and yields 3.0%.
Global manager. No company may be better positioned to cash in on rising global demand for liquids than France's Veolia Environnement (VE). It derives more than half of its revenues from managing municipal and industrial water facilities around the world. And it has desalination operations in Spain, Australia and the United Arab Emirates.
Veolia also has a presence in the world's most insatiable economy: China. The company serves 29 million people in China, thanks in part to a contract to supply water and operate a treatment facility in the city of Shenzhen, just north of Hong Kong. It also recently cut a water-production deal in Tianjin, the nation's third-largest city after Beijing and Shanghai.
Rising fuel prices have hurt Veolia's nonwater businesses, such as transport, putting its stock under pressure. At $47, Veolia is down 46% since last December. But analysts look for a 17% jump in profits next year, to $3.59 per American depositary share. The stock trades at a reasonable 13 times expected earnings.
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