4 Ways to Play Good ol’ Water

by Tom Taulli | July 30, 2012 1:38 pm

Civilization wouldn’t last long without a constant supply of water and wastewater services. But despite its vital role in everyday life, the water industry gets little attention from investors.

The world’s population is expected to go from 7 billion to 10 billion by 2050, so water clearly is going to be a growing concern. But it’s already a big issue today — consider that corn and soybean prices have skyrocketed because of a horrible drought in the U.S.[1], with conditions the worst since the mid-1950s.

In fairness, the companies are downright boring, but when you’re looking at the long haul, boring often can mean lucrative opportunities[2]. It’s also difficult to find pure plays in the water industry — oftentimes, conglomerates are the big operators in the market, such as General Electric (NYSE:GE[3]) or Siemens (NYSE:SI[4]).

Despite this, there are a few water-specific stocks that are worth putting on your radar, including these four:

Pall

Pall Corp. (NYSE:PLL[5]) manufacturers filtration and purification products. It specialties in the food and medical industries, but it even has its hands on high-tech applications such as semiconductor contamination control[6].

For the past few years, Pall has been selling off some of its businesses to companies like Haemonetics (NYSE:HAE[7]), which focuses on blood collection. Pall is also restructuring its operations, trying to get more costs out of its organization. This already is starting to help operating cash flows, which have increased by 16% to $326 million in the past nine months.

PLL shares hit an all-time high around $65 in February, but have since cooled off roughly 15% to current levels around $65. The company now trades at a reasonable 17 times forward earnings, and also offers a modest 1.5% dividend.

Pentair

Pentair (NYSE:PNR[8]) offers a wide assortment of products for water storage and treatment, covering industrial, commercial, municipal and agriculture applications.

The business in Europe has understandably been a drag, but Pentair still has been able to generate growth — in the latest quarter, PNR grew earnings by 11% to 73 cents a share.

A key part of Pentair’s strategy is acquisitions, such as its recent deal for Clean Process Technologies, a top developer of filtration products for food market. But its most important transaction came in March when Pentair agreed to pay $4.53 billion for the flow-control operation of Tyco International (NYSE:TYC[9]). The deal will greatly boost the company’s product line, such as with valves and control systems, and give Pentair a bigger footprint in Asian markets.

Pentair’s trailing P/E of roughly 90 might make a few investors gasp, but its forward P/E of 15 is much more digestible. PNR is making an attack on all-time highs set in April, and currently offers a 2% dividend yield.

Xylem

Xylem (NYSE:XYL[10]), which was once a part of diversified manufacturer ITT (NYSE:ITT[11]), has two main divisions: one for wastewater pumps, filtration and testing, and the other for high-end systems for industrial water and irrigation applications.

A key to Xylem’s business model is the ongoing sales of parts, which helps to boost operating margins and cash flows. The company also has growing presence in emerging markets (with roughly 20% of current revenues in this category), which should provide long-term growth potential.

After making decent headway for the first few months of 2012, XYL shares have fallen to trade roughly flat since the October 2011 spinoff from ITT. But they’re attractively valued, trading at less than 12 times 2013 earnings, which are expected to grow in the low double digits. XYL pays a 10-cent quarterly dividend, good for a yield of 1.7%.

PowerShares Water Resources

If you’re looking for a more diversified approach to investing in water, consider the PowerShares Water Resources (NYSE:PHO[12]) exchange-traded fund.

PHO tracks the NASDAQ OMX US Water Index, which consists of 31 holdings across a number of sectors. While industrials and utilities make up the majority of PHO’s holdings, the fund also carries a little weight in health care, materials and information technology. The fund also reflects the general size of the water-industry world, with less than 5% of its holdings made up of large-cap companies.

Some of PHO’s top holdings include flow-control system supplier Flowserve (NYSE:FLS[13]), utility American Water Works (NYSE:AWK[14]) and instrument maker Waters Corp. (NYSE:WAT[15]). The ETF charges 0.6% in expenses and is roughly even with the market at 11% gains year-to-date.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[16], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[17] and “All About Commodities.”[18] Follow him on Twitter at @ttaulli[19]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. because of a horrible drought in the U.S.: http://investorplace.com/2012/07/4-stocks-to-buy-for-a-corn-trade/
  2. boring often can mean lucrative opportunities: http://investorplace.com/2012/07/yet-another-boring-growth-play/
  3. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  4. SI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SI
  5. PLL: http://studio-5.financialcontent.com/investplace/quote?Symbol=PLL
  6. semiconductor contamination control: http://www.electroiq.com/articles/sst/2012/07/pall-joins-sematech-ismi-to-address-semiconductor-fab-contamination-control.html
  7. HAE: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAE
  8. PNR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNR
  9. TYC: http://studio-5.financialcontent.com/investplace/quote?Symbol=TYC
  10. XYL: http://studio-5.financialcontent.com/investplace/quote?Symbol=XYL
  11. ITT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ITT
  12. PHO: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHO
  13. FLS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FLS
  14. AWK: http://studio-5.financialcontent.com/investplace/quote?Symbol=AWK
  15. WAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WAT
  16. IPOPlaybook: http://investorplace.com/ipo-playbook/
  17. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  18. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  19. @ttaulli: https://twitter.com/ttaulli

Source URL: http://investorplace.com/2012/07/4-ways-to-play-good-ol-water-pll-pnr-xyl-pho/
Short URL: http://invstplc.com/1ftH18x