Water Investing Long-Term Stock Picks Out to 2012 & Beyond (GE, MMM, AWK, WTS, INSU, TTEK, CCC, VE, SBS, DGW, PHO, PIO, ERII, CGW, FIW, CFWAX)


Many water stocks grew in the early part of the last decade because they were building new large infrastructure projects for all of those new housing communities from the 1990’s to 2007.  That business is gone for now and it may be a generation before building comes back strong.  Water is actually not all that immune to the economy, even if you die after a few days without water.  Austerity measures are another group of risks as local, state, and even national governments have to be able to pay for water investments via taxes.  Another risk is protection and seizure, where local government may declare that water is a public asset and we have already seen many local and regional instances where the exporting or transporting of water away has been blocked. There are even documentaries where local groups are forcing change about companies taking water for a fee and selling it elsewhere.  Bottled water has even become the new evil in many aspects even if local tap water is often contaminated, tastes bad, and is believed to contain trace elements of pharmaceutical products.

American Water Works Company, Inc. (NYSE: AWK) remains on top and it remains what we called one of our ten stocks to own for the next decade.  It is the largest public water and waste water utility in many states that serves millions of diverse customers. This may not be a home run stock, but it is also one that doesn’t strike investors out.  Try to go find instances where it has pulled back more than 10%.  Not an easy task and you earn more than 3% in the dividend yield.

This water utility giant is said to have a 1.24:1 price to book value, placing it in the top-tier of the six companies.  The company’s P/E multiple is a slightly higher than average 15.8.  Its 6.8% return on equity (ROE) ranks it in the bottom tier of these water industry players.  American Water Works’ consensus target price of $31.60 implies a mere 8% upside.  Again, we think this can go to $35.00 and any time the stock sells off it should be considered as being “on sale in the investing super-market.”  It recently closed at $29.17 and the 52-week price range is $19.39 to $30.70.

Tetra Tech Inc. (NASDAQ: TTEK) is a diversified consulting and management company with operations in water resources, groundwater services, watershed management, mining, wetland restoration, remedial planning, and even in environmental management.  The company is involved in many large-scale projects tied to state and federal governments.  That used to be great for predictability of earnings, but austerity measures and put-offs in spending pose real and serious risks now.  Tetra Tech also has a history of “good hits and bad misses” on earnings reports and on its guidance.

Tetra Tech Inc. (NASDAQ: TTEK) trades with an implied 1.7 to 1 price to book ratio and its P/E of just over 14 is close to peers among those water companies we favor. Tetra Tech’s $27.88 consensus target price from Thomson Reuters implies about 23% upside from the recent $22.60 close and the 52-week trading range is $18.00 to $27.16.  Our take is that at least some additional weak government business is getting priced into the stock.  As there is no dividend, it may not be suited for widows and orphans.

Watts Water Technologies,  Inc. (NYSE: WTS) is interesting because it has a diversified family of products around valves and other aspects of water conservation, safety, and control in commercial, residential, industrial and municipal applications with operations in North America, Europe, Asia and Africa. If the water infrastructure has to be built out for the next century, Watts Water may find itself as an ongoing winner or it could find itself gobbled up by a larger infrastructure player.

Unfortunately, Watts Water is rarely considered cheap, it has a low dividend yield, and it is not one which can just blindly be bought at any time.  We expect it to remain under peak revenues from 2008.  Still, its portfolio of water equipment assets is rather broad and it is one of the more respected names in the field. There is an old joke about Watts Water for stock geeks… “Watts Water?… It is the stuff you drink, silly.”  Our take is that Watts Water is no joke even if its chart since April has been ugly and painful.

Watts has a 1.4 to 1 price to book ratio, making it one of the better values currently; but its earnings multiple is slightly higher than average at 15.4.   Its 6.2% return on equity probably doesn’t scream value and we won’t try to argue too much about it since its stock has failed to achieve that mega-reward for water investors.  Watts Water’s $35.78 consensus target price implies a meager 8% upside against a recent close of $33.12, but its 52-week price range is $27.16 to $40.62.

Instituform Technologies Inc.  (NYSE: INSU) may seem opportunistic after its post-warning slide and now that shares are very close to 52-week lows.  It is opportunistic, and we intend for it to be.  This is one which you want to buy after it gets hit hard.  The company is into rehabilitating sewer, water, energy, and mining piping systems and the corrosion protection of industrial pipelines.  It just signed a joint venture in Saudi Arabia as well.  The company recently said that North American sewer rehabilitation performance has continued to lag and the coming recovery has been tempered due to current market conditions and scheduling and execution issues. As a result, it lowered 2011 earnings guidance to $1.30 to $1.40 EPS and that makes it hard for us to trust the 2012 consensus target of $1.82 EPS.

Insituform boasts a price to book ratio of about 1.23, although how that compares ahead is not known exactly yet. With a market cap of $759 million, it is also smaller than many we usually consider in water but it now easily leads the value parade if it can live up to its forward P/E ratio of about 11.  Its return on equity was listed as being about 9.5% according to Finviz.   Instituform’s $25.57 consensus target price implies an upside of almost 33%, among the best of our water related companies.  The stock posted a recent close of $19.65 per share.  The 52-week price range is $18.10 to $30.00.

Calgon Carbon Corporation (NYSE: CCC) is one we like, but let’s leave it in the “Watch List” category until it gets a haircut.  It also has a fairly low market cap at $967 million and is in the sweet spot for water filtration.  Its shares rarely “go on sale” and its premium may be because some consider it a target for consolidation.  Don’t blame us that there has been no dividend.

The 2.74 to 1 price to book value ratio may seem very high, which we have tried to show why that is the case.  It also boasts a fairly P/E ratio near 18, but its return on equity is a respectable 10.2%.  Calgon Carbon’s $19.56 consensus target price implies a 12.1% upside.  A recent close placed the company’s shares at $17.44 per share.  The 52-week trading range is $11.75 to $18.20.  Again, put this in as a “watch list” stock and hope it goes on sale ahead.

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