LEAVING AMERICA…. GOING INTERNATIONAL IN ADRs
Veolia Environnement S.A. (NYSE: VE) is thought of as one of the largest water plays out there, but we also have to admit that ts water operations also are met with waste, energy, and transport units. The company is based in France and it boasts over 150 years of experience managing public water and wastewater services in public-private partnerships. It is a massive outfit as its water treatment alone recently had over 12.5 billion Euros in revenues; the unit for water claims 95,000 workers in well over 60 countries offering drinking water and wastewater services to more than 160 million people. That being said, it is not immune from global austerity measures and it also has not escaped the world turmoil of 2011. There won’t likely be another dividend for about 11%, but the current annual payout (with currency fluctuation risks) would translate to roughly 6.3% today.
With a $27.10 share price, Veolia’s consensus price target for U.S. investors of about $35.00 is really only from two analysts. Shares have been punished since April’s end and that is why we are being opportunistic again in the ADR. Shares peaked around $90 before the recession, so the global slowdown has definitely worked against it and shares have just not really ever recovered. Valuations are low enough, what Finviz listed as about 1.14-times book value, and it trades at about 14-times earnings and was screened to show roughly 7.8% return on equity. The 52-week price range is $21.86 to $32.00.
Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE: SBS) is up substantially since we covered this in late-2010. The company’s ADR is an interesting equity play for Brazil and is called “SABESP” locally. SABESP provides basic and environmental sanitation services in the Greater Sao Paulo metropolitan area for water, sewage, and industrial wastewater systems. It also wholesales water to six more municipalities, operates in over 360 municipalities and serves more than 26 million people. The stock still trades under 10-times earnings but its dividends have been spotty. The ADR recently traded at $59.35 and the 52-week trading range is $37.70 to $62.88. Brazil is hot, but you have to enter here entirely at your own risk.
THE RISKY WILD CARD IN DESALINATION
There are many much smaller companies we have reviewed from time to time, and one of the smaller and riskier bets that has the pedigree is called Energy Recovery, Inc. (NASDAQ: ERII) with a tiny market capitalization of about $161 million. It has also severely failed to live up to the hype. Making pumps for desalination should be a win in theory, but its chart looks like a downward staircase since its 2008 IPO. It recently closed at $3.07 and the 52-week range is $2.35 to $4.57. This is one where you will have to your own homework because it is now thinly followed, it suffered from declining revenues, and it is too small for us to pay much attention to.
WATER ALTERNATIVES VIA ETFs & FUNDS
Water has also had a mixed performance when it comes to the world of ETFs. Still, there are at least some alternatives for U.S. and international water growth and these are still quite a bit higher than when we covered the full water sector in-depth in late-2010.
There is a more domestic water ETF in the PowerShares Water Resources (NYSE: PHO) that trades at $18.70 and its 52-week trading range is $14.42 to $20.61 with an average daily volume of about 200,000 shares.
Then there is the less liquid and smaller international water ETF theme via the PowerShares Global Water (NYSE: PIO). At $19.52, its 52-week range is $15.89 to $21.50. It trades an average of about 68,000 shares per day.
Guggenheim S&P Global Water Index (NYSE: CGW) recently closed at $20.95 and has a 52-week range of $16.46 to $22.44. It trades an average of about 52,000 shares per day.
Lastly, there is the First Trust ISE Water Index (NYSE: FIW). The recent close was $22.18, the 52-week range is $16.90 to $24.40, and the average volume is about 20,000 shares per day.
One alternative for water investors in open-end funds is the Calvert Global Water (CFWAX) Fund with some $62 million in assets under management. It is a global fund and some top holdings are some of our top current picks as well.
HISTORIC M&A DEALS IN THE WATER SEGMENT
You have to wonder why the sector is hard to invest in. For starters, because we said so. All joking aside, here are just some of the key water deals which have been announced in recent years:
- General Electric bought Ionics for some $1.1 billion;
- 3M bought Cuno for close to $1.3 billion;
- American Water in 2007 announced the asset purchase of water system located in Ewing, Hamilton, Hopewell and Lawrence townships in New Jersey for about $100 million.
- SouthWest Water also went private in a private equity purchase this year in a 56% premium buyout by JPMorgan and Water Asset Management.
- Millipore was not only in water, but it was bought for about $6 billion by Merck KGaA.
Water is the source of life. The developing world suffers from a lack of potable water and this issue is not one which will simply go away just because we have water fountains giving the stuff away for free here. The sector is not without perils and not without risks for investors.
Most long-term investment portfolios need to at least have some exposure to profiting from water. Your financial health could depend upon it. Some additional outside water news and research is as follows:
Water Asset Management lists many of the sector fundamentals.
More than one-third of all counties in the continental-US face higher risks of water shortages by mid-century.
Back in 2008, The Futurist had a cover story called “Draining Our Future: The Growing Shortage of Freshwater.”
There really are traces of pharmaceutical compounds all throughout the water supplies of major cities.
JON C. OGG