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(Thanks to Snowshoe for the article link)
Markets
Water Investing Enters The Mainstream
Peter Kang, 12.20.04, 3:00 PM ET
NEW YORK - About three years ago, word on the Street was that water was going to be a commodity as valuable as oil in the new millennium. By no means a secret now, investors are plunging headfirst into the once-ignored sector and finding a sea of green in the rapidly growing $350 billion market. Demand for fresh water in the United States is expected to grow 70% over the next 25 years, according to industry analysts. Global demand--mainly from China--is set to grow more than 20% annually.
"An oft-quoted statistic is that only 2.5% of the world's water supply is fresh water, and of this amount, over 90% is permanently frozen," Goldman Sachs said in a recent report. "While there has been some complacency on this topic, bottled water still costs more than gasoline, even with oil above $50 per gallon."
Sorting through the fragmented water industry, however, may be daunting at first. Investors can choose companies that specialize in particular areas of water services, including municipal water utilities, wastewater-infrastructure companies or water-technology firms. A number of companies also dabble in various subsectors with which typical investors may not be familiar.
Yet while utility companies such as Aqua America (nyse: WTR - news - people ) have enjoyed broad gains in share price this year, the darlings of the industry remain the providers of water-treatment technologies. These midsized companies are ripe for acquisition, as the lucrative water-purification market has become a strategic focus for multi-industry behemoths Siemens (nyse: SI - news - people ) and General Electric (nyse: GE - news - people ).
Siemens has made significant inroads in the market, snapping up US Filter for $993 million from French industrial giant Veolia last May. GE announced last month it would acquire Ionics (nyse: ION - news - people ), a leader in desalination and mobile filtration, for $1.1 billion. Consolidation in the sector is expected to continue, says Prudential Equity Group, with GE likely to make one more acquisition in order to complete its expansion.
Potential acquisition targets for GE include Cuno (nasdaq: CUNO - news - people ) and Pentair (nyse: PNR - news - people ). Both stocks have a "buy" rating from research firm Adams Harkness. Water companies targeted for acquisition tend to possess both high revenue streams and superior technologies, according to John Quealy, an analyst covering the water and wastewater-solutions sector for Adams Harkness. Although Quealy did not name any potential takeover targets, he noted that "companies that have the technology and the brand name and the customer lists" will attract the greatest attention. "Ionics had all of those," he said.
Quealy noted that Cuno's solid organic growth rates and strong operating margins complement the company's cutting-edge advances in research and development. Cuno, which ranks No. 152 on Forbes' list of the 200 Best Small Companies, is also a leader in the appliance water-filtration market, and has developed strong relationships with Maytag (nyse: MAY - news - people ) and Whirlpool (nyse: WHR - news - people ). Cuno recently reported fiscal 2004 sales of $352 million and earnings of $1.93 per share. Revenue and earnings were both up 22% from 2003.
Following Pentair's sale of its tool business to Black & Decker (nyse: BDK - news - people ) and its July acquisition of water-filtration firm Wicor Industries, the company now offers "one-stop shopping" for water-related products, says Quealy. "Pentair is probably the biggest pure play in water now. [It has] the most products; in any water application, Pentair has a product for you. [It is] really a global major player in a lot of different subsectors, everything from pools, municipal pumps, commercial filtration, the agriculture area. [Pentair challenges] some of the largest players in the space, including US Filter, GE and ITT Industries."
Pentair likely welcomes a challenge more than a buyout. Chief Executive Randall J. Hogan was a manager at GE in the late 1980s and early '90s, and his company recently announced a new shareholder rights plan, or "poison pill" takeover defense. Regardless of whether Pentair goes it alone, the rising tide of global demand will provide plenty of lift for even the smallest players.
forbes.com |
