The water utilities covered by Gabelli were American Water Works Company, Inc. (NYSE: AWK), Aqua America Inc. (NYSE: WTR), California Water Service Group (NYSE: CWT), and American States Water Company (NYSE: AWR). 

Gabelli’s research noted, “Water utility stocks and the S&P Composite are unchanged year-to-date, which compares to an 11% advance for the S&P Utilities Index… we believe the water and wastewater industry is ripe for new rounds of consolidation and privatization as the sector is in the early stages of an extended period of restructuring.”

American Water Works Company, Inc. (NYSE: AWK) currently trades at $30.80 and it remains our own personal favorite for water investors.  We think this can go to the mid-$30′s or even get closer to $40 ultimately, but we are way short of Gabelli’s “private market value.”  Thomson Reuters has a consensus price target of $34.00, but Gabelli’s “PMV” is all the way up at $44.00 for this year, $47.00 for 2012, and $49.00 for 2013.  Cited are strong earnings growth, proposed water rate hikes, acquisitions, and asset changes.

Aqua America Inc. (NYSE: WTR) currently trades around $22.00 is also given high upside marks by Gabelli and its private market values are as follows: $27.00 for 2011, $28 for $2012, and $30 for 2013.  This upside is based upon strong credit ratings and a low-risk business model which has both a cost-driven model and a growth oriented culture.  Thomson Reuters has a consensus price target of about $24.60.

California Water Service Group (NYSE: CWT) trades around $18.80 and Gabelli calls it a high-quality water utility with a strong balance sheet (46% common equity) with an A+ investment-grade rating.  Recent and pending rate relief were also cited as strengths.  Gabelli’s private market value is $24.00 for 2011, $27.00 for 2012, and $28.00 for 2013. Thomson Reuters has a consensus price target of $21.00.

American States Water Company (NYSE: AWR) trades around $35.50 and Gabelli noted a strong balance sheet (53% common equity), an ‘A+’ investment-grade ratings, recent and pending rate activity, a 3.2% dividend, and privatization contracts.  Gabelli gives a private market value rating as follows: $48.00 for 2011, $50.00 in 2012, and $53.00 in 2013.  Thomson Reuters has a consensus price target of $38.34.

Again, these private market value ratings are not exact price targets.  They are meant to show implied upside bands under certain situations.  The Thomson Reuters consensus price targets are generally 10% above current share prices.

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JON C. OGG

Pepsi’s third quarter report came to $1.31 EPS versus $1.30 EPS estimates from Thomson Reuters.  Revenues rose to $17.58 billion versus estimates of $19.19 billion.

The company attributed international growth and the acquisition of a Russian beverage outfit earlier as the key metrics helping it to beat expectations. 

What has been an issue here is that shares of Pepsi were not acting defensive as they are supposed to.  The company has said that earnings would be up in the single-digits and this includes a global uncertainty in macroeconomic and consumer trends.  Offsetting concerns over commodity prices for the company, Pepsi is on track to have repurchased about $2.5 billion in stock in 2011.

Shares are up 0.5% at $61.26 in the pre-market.  To show just how bad things have been, the 52-week range is $58.50 to $71.89.  As a comparison, Coca-Cola shares closed at $66.80 yesterday and the 52-week range there is $59.34 to $71.77.  Coca-Cola is also indicated up with about two hours before the open.

JON C. OGG

While many investors are opting for safety at any cost, there is an army of retirees and near-retirees that are depending upon income from their life savings in order to live, and these investors are being forced to look elsewhere in predictable dividend stocks and other instruments that they feel are low in risk. Utility stocks have accidentally become the new CDs and bonds for investors due to their safety, suitability and high dividends.

Generally speaking, utilities have fairly predictable earnings and they pay out a substantial portion of their income as dividends. Some utilities now pay dividends that yield more than 4% to investors. The power companies often have local competition in their local markets now due to deregulation and the ongoing regulatory pressure of carbon emissions is actually keeping a lid on some of the upside that might otherwise be there. The trick is for investors to find the utilities where the dividend is safe even if these companies are forced to spend the collective billions due to new environmental areas.

Utilities have not been immune to the market pressure this week, but the reality is that the sector was within about 2% or 3% of the yearly highs as recently as last Friday. A 5% sell-off in the past two days may be an opportunity for those investors with long-term outlooks. The utility sector appeals to many investors looking for income, value, predictable growth, and they also classify as defensive stocks. Investors used to look for the highest yielding CDs from insured banks and savings & loans, but now that opportunity is only found in utilities.

We have compiled a list of the key liquid exchange-traded funds and a closed-end funds for investors who want diversification. We have also screened out three of the top electric utility stocks for retail investors that offer the following minimum criteria: $5 billion in market value, a 4% or higher yield, not trading at a 52-week high but also not down more than 10% from the highs (avoiding the troubled players) and which also have 10% or more upside to the consensus analyst price targets from Thomson Reuters. Lastly, we have our top water utility in America that is slightly outside of the normal utility parameters for the power generation and electric utility companies.

In ETFs and Funds, we have highlighted the Utilities Select Sector SPDR (NYSE: XLU), iShares Dow Jones US Utilities (NYSE: IDU) and the Reaves Utility Income Fund (AMEX: UTG). In utility and generation companies we have identified American Electric Power Company (NYSE: AEP), FirstEnergy Corporation (NYSE: FE) and PP&L Corporation (NYSE: PPL). In the water utility sector, we have discussed American Water Works Company, Inc. (NNYSE: AWK). What matters most here is the current situation and opportunity on each. As we always stress: understand what you are investing in!

The water utility giant has raised its earnings guidance to an adjusted range between $1.75 and $1.82 EPS.  This compares to a prior range of $1.65 to $1.75 EPS.

American Water Works cited an “increase in system delivery related to a very hot and dry July in the company’s East Coast systems, favorable weather in the Midwest, cost efficiencies, and the continued expectations of a low interest rate environment.”  This low interest rate environment is key as utilities have to rely upon long-term borrowings in most cases.

Another gain is here as well.  The increased guidance for 2011 does not recognize the benefit to net income and EPS of the cessation of depreciation for discontinued operations in Arizona, New Mexico, Texas and Ohio.  That benefit was put at about $0.09 for 2011 EPS on a GAAP earnings basis.

American Water Works is a winner all the way around.  It is one of our Ten Stocks To Own For The Next Decade and it remains our top water stock looking out 2012 and beyond.  We expect the water utility giant to keep raising dividends for years and years.  The biggest win of all is that the company is the ultimate safety stock with a very broad geographic foot print in America where it is the local water utility monopoly.  Who cannot live without their water utility?

Shares closed at $29.50 yesterday and the stock is indicated to open above $30.00 this morning.  That puts it in striking distance for a new high as its 52-week trading range is $22.94 to $30.70.

JON C. OGG

We have been searching for deep value stocks of late now that the market sell-off has taken out a large bite from the value of many major companies.  Some analysts group food differently than beverages, but our screen includes all of the following to identify the best value: Campbell Soup Co. (NYSE: CPB); The Coca-Cola Company (NYSE: KO); ConAgra Foods, Inc. (NYSE: CAG); Dr. Pepper Snapple Group, Inc. (NYSE: DPS); General Mills, Inc. (NYSE: GIS); Hormel Foods Corporation (NYSE: HRL); Kellogg Company (NYSE: K); Kraft Foods Inc. (NYSE: KFT); Pepsico, Inc. (NYSE: PEP); Tyson Foods, Inc. (NYSE: TSN); and Smithfield Foods Inc. (NYSE: SFD).

We are looking at food and beverages separately today in identifying the best value for investors looking for safe havens in the storm.  This sector is already very defensive in nature, and we found that the defensive sector of consumer products actually has a market premium due to investors seeking safety.  The good news is that the food and beverage sector has a few differences.

Campbell Soup Co. (NYSE: CPB) recently traded at $30.85 and its market cap is $10 billion.  The stock’s 52-week trading range is $29.69 to $36.99.  The current value is trading at a price-to-book ratio of about 9 to 1.  Its forward price earnings multiple is 12.2 and its return on equity is 78.8%.  The canned soup company currently pays a dividend yield of about 3.8% to investors.  Thomson Reuters has a consensus price target of $34.00, implying roughly 10.2% upside to the most recent price.  Campbell is under a new CEO and undergoing some change.  It is hard to imagine that this is a luxury good or a health food group stock, but the company has been under fire from private-label soups in the past and it is now going to add more salt and flavors to regain some market share.  Due to the correction, there is almost a turnaround element here.

The Coca-Cola Company (NYSE: KO) recently traded at $69.37 and its market cap is $159 billion.  The stock’s 52-week trading range is $56.01 to $71.77.  The current value is trading at a price-to-book ratio of about 4.5 to 1.  Its forward price earnings multiple is 16.1 and its return on equity is 41.29%.  The beverage giant currently pays a dividend yield of 2.71% to investors.  Thomson Reuters has a consensus price target of $77.86, implying roughly 12.2% upside to the most recent price. What is so interesting about Coca-Cola is that it just the magic 52-week high list right after Labor Day.  Coke and water, you gotta drink!  This is a huge position for Warren Buffett, but chances are that it will be that way in a decade from now (or for his successor).

The new index barometers will join the NASDAQ Water Index and the NASDAQ Water Total Return Index.  Whether this is green or sensible is up to you, but there is a fair question to ask here: How many water indexes are needed?  The new indexes are as follows:  OMX Global Water Index, NASDAQ OMX Global Water Total Return Index, NASDAQ OMX US Water Index, and the NASDAQ OMX US Water Total Return Index.

What is interesting about this and only highlights our key question even more is that NASDAQ is selecting the constituents from the same universe of stock picks as the first two water index readings.  The difference is in the component weightings. The total return indexes reinvest dividend payments and the price returns effectively discount the dividends.

Potable water and its future availability remain the key topics of why your investment portfolio should chase this sector.  Again, the trick is that it is not easy.  It turns out that many “water companies” turned out to be dependent upon the creation of new housing subdivisions over the last fifteen years or that they are tied heavily to government contracts.  General Electric Co. (NYSE: GE) and 3M Co. (NYSE: MMM) are two key holders of water investing, but these water operations are mixed with fluids in these conglomerates and investing in any conglomerate because of one aspect of their business just misses the point of investing.

Along with the theme of water investing for the long-term, we did create a list of Stocks to Own for the Next Decade and that included American Water Works Company, Inc. (NYSE: AWK).

What makes water difficult to invest in is that fluid and hydraulic outfits keep looking to consolidate via mergers and acquisitions.  This fresh Nalco Holding Company (NYSE: NLC) merger with Ecolab Inc. (NYSE: ECL) has the goal of adding $5.4 billion in a combination of cleaning, sanitizing and water management.

We now have ITT Corporation (NYSE: ITT) breaking itself up and one of the 3 surviving companies, its water company, will be called Xylem under the “XYL” ticker on the New York Exchange.

We recently featured some of our top water investments out to 2012 and beyond, including American Water Works Company, Inc. (NYSE: AWK), Insituform Technologies Inc. (NASDAQ: INSU), Tetra Tech Inc. (NASDAQ: TTEK), and others.  This was an expanded and updated module for our Top Water Pick for 2011.

What we do expect as one possible outcome from more index launches is the creation of more exchange-traded funds which track water investing.  There are already ETF products around the Palisades Water Index and Standard & Poor’s indexes.  ETFs do not currently track the NASDAQ indexes in water per our most recent screens.

PowerShares Water Resources Portfolio (NYSE: PHO) has more than five years of history and it has well almost $1.2 billion in assets inside the ETF.  Its international equivalent that includes the U.S. but is more globally focused is the PowerShares Global Water Portfolio (NYSE: PIO) but that one is only about one-third of the size in assets and only about one-fourth as liquid when measuring shares per day.

And then come the less liquid water ETFs, no pun intended… There is also the Guggenheim S&P Global Water Index (NYSE: CGW) ETF, which carries about $250 million in assets and trades about 50,000 shares a day.  The even smaller First Trust ISE Water Index Fund (NYSE: FIW) has about $69 million in assets but trades an average of under 20,000 shares per day.

There are many more ways to invest in water, but you have probably gathered that we maintain it is not an easy sector to invest in.  Many pure-play water companies trade at significant premiums to the broader market.  Even when you go through the individual stock holdings that these water ETFs hold, you will suddenly realize that the term “Water Investing” really translates to “companies which also have water operations.”

JON C. OGG

The combined entity is expected to have annual revenues of roughly $11 billion.  The deal also values Nalco at $38.80 per share, which is a 34% premium to yesterday’s closing price of Nalco.  Nalco’s shareholders get to choose a cash-out or a stay-in as Ecolab is giving shareholders the option to either receive 0.7005 shares of Ecolab common stock per Nalco share, or they can choose to receive $38.80 in cash.  The overall mix of consideration paid to Nalco shareholders will be approximately 30% cash and 70% stock.

Ecolab noted that it will issue about 68.9 million shares of Ecolab stock and that it will pay out about $1.6 billion in cash.  As part of the deal, there is also the assumption of about $2.7 billion in debt, making the enterprise value of the deal come to about $8.1 billion.

In the announcement, Nalco also announces record preliminary second quarter sales estimates and it raised guidance for 2011.  The transaction has been approved by both boards of directors.

As of the close, Nalco was valued at $4 billion with its $28.87 share price and the 52-week range was $21.98 to $32.62.  This buyout represents all-time highs.  Ecolab shares closed at $55.39 with a market cap of $12.85 billion and its 52-week trading range is $46.05 to $57.19.

JON C. OGG

ITT Corporation will operate its core businesses and will continue to trade on the New York Stock Exchange, under the symbol “ITT.”  ITT Corporation will retain the current corporate name, logo and “Engineered for life” company tagline and its new description is “a global specialist in the engineering and manufacturing of critical components that provide highly customized solutions for its customers.”

The newly separated companies also intend to have their shares listed on the New York Stock Exchange.  The future water company will be named Xylem and will list under the ticker symbol “XYL.”  The future defense company will be named ITT Exelis and will list under the ticker symbol “XLS.”

Until completion of the spinoffs, ITT Corporation will continue to operate with the existing segment structure and division names.  Xylem and ITT Exelis plan to unveil their new logos and further information on their new brands at a later date.

Shares of ITT recently closed at $57.26.  Its 52-week range is $42.05 to $64.00.  The current market capitalization is $10.5 billion, but that will soon change.

JIM BERDOU

Water is a sector we consider as a “Must-Have” in most long-term investment portfolios.  We have even gone as far as saying that H2O is one of the key and critical investment sectors for futurists, who often look out a decade or more when evaluating trends.

Investing in water used to be much easier, but now companies like General Electric Co. (NYSE: GE) and 3M Co. (NYSE: MMM) have helped to consolidate the filtration segment of the water-trade.  Both of those are attractive investments from time to time, but both are far too broad to invest in just because they have water exposure that will drive growth in the future.  The top water stock for 2011 from 24/7 Wall St. was American Water Works Company, Inc. (NYSE: AWK) and that remains a favorite today.  Shares were trading around $25.30 when that award was issued versus about $29.00 now.  We continue to love this company and we admire its recent dividend hike.

Our goal is not just to update our own price target in American Water Works Company, Inc. (NYSE: AWK).  We believe that can continue on higher and we now think that $35.00 is feasible.  It just raised its dividend and we expect another dividend hike in a year and then again after that.  Still, the goal is to now identify those water investments which offer both growth and safety ahead as the stock market and economy are facing mixed outlooks.

Since we started covering the sector broadly, a lot has changed. Conversely, much remains the same as well and that is a good thing.  The 2012 election cycle is not far away, the economy is in a soft-patch, Greece is a real threat that could to topple Europe, Japan is trying to get out of the red in its GDP again, and both China and India are trying to slow their economies to fight inflation.  We want to review our “investable water universe” and single out some of our own single ‘best idea’ water investing strategies based on today’s valuations and trends of today that can have a significant upside ahead.

Some reports have been out about actual water scarcity here in America.  Securing potable water reserves in the future will be a challenge for many nations and this is where the term “The International Water Wars” comes from.  The water sector has given large rewards in some cases, and been very painful in other cases.

We are reviewing the following today: American Water Works Company, Inc. (NYSE: AWK); Watts Water Technologies, Inc. (NYSE: WTS); Instituform Technologies Inc.  (NYSE: INSU); Tetra Tech Inc. (NASDAQ: TTEK); and Calgon Carbon Corporation (NYSE: CCC).  On the international scene, there is Veolia Environmental S. A. (NYSE: VE) as well as Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE: SBS) as the international emerging wild cards.  To show just how risky this can be in foreign lands, there is Duoyuan Global Water Inc. (NYSE: DGW) that has been crushed with the batch of reverse-merger companies out of China and which has been halted for some time.  For more diversified picks via ETFs, there are also the PowerShares Water Resources (NYSE: PHO) and the PowerShares Global Water (NYSE: PIO) to consider.

We noted earlier this month that the Bonneville Power Administration (BPA) that high water conditions in the Columbia River drainage could lead to the shutdown of wind generation in the region.  The threatened shutdowns have now come to pass.

High runoff in the Columbia and Snake Rivers have filled the BPA dams to bursting. The BPA is prohibited by EPA regulations from opening the dams’ spillways because that increases nitrogen levels in the water that will kill the river’s fish. So the hydro-turbines have to run more, generating more electricity which fills the region’s grid capacity. Because the grid is maxed out with hydro-generated power, the BPA has no choice but to stop accepting wind-generated power.

For wind-farm operators, this results in a loss of revenue because BPA only pays for energy it receives. This state of affairs will continue until the grid is expanded to accommodate wind generation.

In Scotland, a similar problem occurred in April. Six of its wind farms were paid about $485,000 to shut down generation for two days because the electricity grid did not have capacity available to take the power.

Unlike the situation in the US Northwest, Scotland’s grid operator is required to pay for the shutdowns. The grid operator paid almost $1.5 million to the six wind farms for a few hours when the grid could not accept the electricity. In some cases the payments were 20 times higher than the value of the electricity if it could have been put on the grid. Consumers will ultimately pay for the grid operator’s largess.

Lack of access to the grid isn’t the only problem that wind generation faces. The low cost of natural gas in the US also affects the willingness of developers to build new wind farms. The US added 10,000 megawatts of wind generation capacity in 2009, and that could drop to as little as 5,000 megawatts of new capacity by 2012.

The blame is laid at the feet of shale gas, which is keeping the cost of natural gas low. Costs for wind turbines have been falling to the point where the cost of building a new wind farm matches up very closely with the cost of a new natural gas-fired plant. State renewable portfolio standards also help push wind generation development, but uncertainty over tax credits and lower demand for electricity as a result of a slow US economy more than make up for the positives.

The expansion of wind generation in the US has reached the point where continued development is just as likely to depend on grid capacity as on demand for electricity. Of course new gas- or coal-fired plants also require expanded grid capacity as demand grows, but those plants can be built anywhere and the cost of grid connections is keep lower. Wind and solar plants are typically far from grid connections, and the cost of building the transmission lines is not usually a part of the wind developer’s project.

Long distance transmission lines and grid connection expansion are the red-headed stepchildren of the electric power industry. This is perhaps an even bigger issue than the intermittency of wind and solar generation.

One of the unusual suspects working on grid connections is Google, Inc. (NASDAQ: GOOG), which owns about 42% of the $5 billion Atlantic Wind Connection project to construct an underwater transmission line along the Atlantic Coast of the US.  The project’s developer has just received a rate-of-return decision from the FERC for 12.95%, which was less than the 13.58% the company sought. The approval is conditional on the Atlantic Wind’s inclusion in an expansion plan by the regional grid operator. A permit from the US Department of the Interior is still pending to build the line on the sea floor. There are still plenty of other hoops to jump through before the grid expansion is complete — now expected in 2021.

Finally, a privately held solar thermal maker, SolarReserve, has received a $737 million loan guarantee to build a solar thermal plant in Nevada. The company is a joint venture between a division of United Technologies Corp. (NYSE: UTX) and private equity firm US Renewables Group.

What makes this project unique is its use of a molten salt heat storage technique that stores heat provided by the sun during the day to generate electricity at night. Overcoming the intermittency of solar generation could be a major step in developing more utility-scale solar installations.

Paul Ausick