Water is harder to pump than crude oil. It’s also harder to invest.
Water, believe it or not, is denser than crude oil, which makes transporting it a feat. In fact, while energy is one sector, water is an amalgamation of 17 subsectors, according to RBC Capital Markets analyst Deane Dray, including water treatment, valves, pumps, filtration, desalination and metering.
Water, despite its importance to life, is also much smaller business than oil. Dray, who has presented at United Nations water conferences, estimates the size of the global water business at about $655 billion a year, a fraction of the roughly $3 trillion worth of crude oil consumed worldwide each year.
However, drought, climate change, population growth and a focus on investment in the environment, social and corporate governance make water an ever-interesting sector for investors. The trick, Dray explains, is to invest in water businesses with the best technology, not just interchangeable items.
“The world is awash in commodity water products: pipes, pumps and valves,” says Dray. “The emphasis should be on smart water systems.”
But there’s room for utilities, too, says Jay Rhame, a portfolio manager for the
Virtus Reaves Utilities
exchange-traded fund (ticker: UTES), which points to their stability as a major selling point. Exhibit No. 1:
(YORW), a small Pennsylvania utility that has been paying dividends continuously since 1816. Its streak is believed to be the longest in US history.
With a market cap of $620 million, York may not be a good fit for every portfolio. However, the six stocks discussed on this page deserve a closer look.
American Water Works
Investors like water companies for their stability and
American Water Works
(AWK) is as stable as they come. The company is expected to grow its earnings at an annual rate of 8% over the next three years, after growing them by 8% annually over the past decade.
That consistency has earned American Water Works a price-to-earnings ratio of 32 times its three-year average. It’s not hard to see why. Everyone needs water and almost everyone pays their bill. In addition, utilities are allowed to have performance for fixing and replacing pipes. Rhame says this makes viewing their results relatively easy. The stock pays a 1.7% dividend.
(DHR) is not a clean water company, but it is a technology provider with a strong market position, says Dray, who estimates that 10 percent of its sales are directly related to water. “I’ve been to water facilities on five continents and they all use Danaher water testing systems,” he adds.
Danaher stock trades for about 26 times estimated 2023 earnings, a slight discount from the average of 28 times in recent years. The company is expected to grow earnings at an annual rate of about 7% for the next three years, but that may be conservative. It has historically grown its earnings at an average annual rate of around 12%.
(WTRG), based in Bryn Mawr, Pa., isn’t a pure play—it also supplies natural gas to customers—and that makes it a little less stable than American Water Works. Its track record is still impressive “It’s a very well-run water company,” says Rhame,
Essential Utilities’ earnings have grown 9% annually over the past decade and should grow 8% annually on average over the next three years. Essential Utilities’ stock trades at about 27 times next year’s expected earnings, based on its recent history, though not as high as American Water because of its natural gas business. The shares have a dividend yield of about 2.3%.
Evoqua Water Technologies
(AQUA) cleans water for more than 38,000 customers in industries including electronics, manufacturing and even water parks. Stock isn’t cheap. It trades for 37 times 2023 earnings, a premium to its three-year average of 35. But earnings are expected to grow 15% annually over the next three years, up from 10% in recent years.
Evoqua is also one of the few companies with ways to “forever” remove chemicals, or PFASs, from water, which could be a billion-dollar business if the federal government designates them as hazardous substances. Dray rates the stock an outperform and has a $44 target on the stock, up about 15% from recent levels.
Mueller Water Products
based in Atlanta
Mueller Water Products
(MWA) manufactures fire hydrants and has one of the largest installed bases of iron gate valves, used to shut off the flow of water in mains or garden hoses, in the US.
Mueller’s earnings are cyclical and can rise and fall with the economy. The stock fell 10% after the company missed fiscal third-quarter earnings in August, a development it blamed on inflation and supply chain pressure. Seaport Global Water analyst Liptak believes the decline is an opportunity.
Profits are expected to grow at around 13% annually for the next two years. At 17.5 times 2023 earnings, Mueller trades at a slight discount to its three-year P/E of 18.3 times.
Leaky pipes are a big problem. The average age of a water main in the US is about 45 years. And Rye Brook, based in New York
(XYL) is here to solve it. If a utility has a water leak, Xylem can locate and diagnose the problem remotely. About 35% of the company’s sales come from digital products, and that should approach 50% by mid-decade, says Alec Lucas, an analyst at ETF provider Global X.
Xylem stock trades for about 30 times estimated 2023 earnings, well above the
17. But profits are expected to grow at an annual rate of 25% for the next three years. Digital products, which have better margins, help boost profits, Lucas says.
Write to Al Root at email@example.com