Water is not the world’s most glamorous industry. But recent droughts and climate events have shown that water stocks will hold an increasingly important place in the investment portfolios of tomorrow.
Research from Colorado State University found that nearly half of the 204 American freshwater basins that they studied would be unable to meet demand over the next fifty years. Between pollution, population growth and climate change, there are many pressures on the water supply.
Fortunately, there are companies working to provide the solutions to this crisis. From more efficient water usage to effective testing and recycling, these three water stocks can play a large role in managing this ecological challenge.
Badger Meter (BMI)
Badger Meter (NYSE:BMI) is one of the rare pure-play water companies. As its name would suggest, the company’s primary line of business is in selling water meters. It has a range of water meters from traditional static devices to newer radio and software-controlled ones. The company also sells a number of ancillary products such as valves and sensors.
Water meters might seem like a mature business. However, Badger Meter has gushed with growth in recent years thanks to investments in categories such as water quality and industrial discharge monitoring. The surge in manufacturing and logistics activity in North America is likely to give the industrial division a boost. Indeed, analysts see 24% top-line growth for the company this year.
BMI stock is not cheap, trading at more than 40x forward earnings. However, pureplay water stocks tend to be expensive given their mission-critical business and the limited number of investment options.
And Badger has backed up its valuation ratio; it has put up a sparkling 19.1% annualized total returns over the past decade thanks to its consistent business and earnings growth.
Veralto (NYSE:VLTO) is the newest water stock in America.
The company just came into existence thanks to a spin-off from health care conglomerate Danaher (NYSE:DHR) at the end of September. Danaher has decided to become entirely focused on lab tools and life sciences, and thus turned its former water division into a separate company, now known as Veralto.
Veralto breaks its water mission into three parts: Safe drinking water, water conservation and water reuse. These check the right boxes in terms of making water safe, affordable and environmentally sustainable in the years and decades to come.
Danaher has had a tremendous track record over the years, with its stock crushing the S&P 500 over the long-term. Veralto will bring Danaher’s streamlined business management and M&A approach to the water industry and, in turn, deliver sparkling results to its shareholders.
Xylem (NYSE:XYL) is a dominant player in the water infrastructure space. The company’s business lines include water measurement, water infrastructure and applied uses of water. Its products help customers with water storage, testing and efficiency.
Xylem has built its business to provide everything that a water utility could need, which creates efficiencies in terms of sales and marketing. Instead of buying pipes one place, meters another, and testing services from a third vendor, Xylem aims to be that one-stop stop.
Like Badger, Xylem tends to be an expensive stock, often trading above 30 times earnings. However, shares have slid about 10% over the past year, even as earnings have been satisfactory. That leaves the stock at a reasonable 26 times forward earnings.
On the date of publication, Ian Bezek held a long position in DHR and VLTO stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.