Water is finally coming into its own as an investment theme, not least because climate change and population growth are putting enormous stresses on this vital global resource.
This is creating a long-term need for technologies that can increase the supply of clean water and make better use of the water that exists. The key technologies include water testing and purification, desalination techniques, mechanized irrigation systems, fertilizers and drought-resistant crops. There are dozens of significant global firms that serve these niches.
For your clients, there are two ways to play the water theme. The safest is to consider exchange-traded funds. Two new ETFs — Powershares Global Water Portfolio and Claymore S&P Global Water Index — began trading last year on the American Stock Exchange. Each tracks global firms with a focus on treating and providing water.
It’s somewhat early to judge the value of these ETFs as investment vehicles, although both roughly tracked the S&P 500 index during the first quarter of 2008. However, investors can see the potential of the water theme in Powershares Water Resources — an ETF focused on U.S. firms that began trading on the ASE late in 2005. From yearend 2005 to March 28, Powershares returned 26.3% compared with a 2.6% rise in the value of the Nasdaq composite index and a 22.2% increase in the S&P/TSX composite index over the same period.
Investors who prefer to pick individual stocks may find it difficult to isolate pure plays when it comes to water. That’s because many of the key firms in this industry are engineering or chemical conglomerates that pursue water-related technologies as one of many product lines.
Nevertheless, it’s possible to come up with a list of dozens of firms that rely on water-related products for a significant portion of their total sales. Investment Executive analyzed the top holdings of several water ETFs as well as more than 30 water-focused companies cited in a March 5 research report by Shirley Knott, an analyst in London with UBS Investment Research.
The following three companies are the best three bets, as ranked by analysts tracked by Reuters Ltd. :
> Thermo Fisher Scientific Inc. of Waltham, Mass. is an analytical and lab instruments giant created by the November 2006 merger of Thermo Electron and Fisher Scientific. All 10 of its analysts rate the firm a “buy,” with an average share price target of $67.75, compared with $57.95 at the close of trading on April 4.
About 35% of Thermo Fisher’s sales are derived from its industrial and environmental products, which include high-quality meters for analyzing water. Although Thermo Fisher does not provide financial details about its environmental sales, the company’s total revenue is expected to jump 8.6% to US$10.59 billion in 2008 from US$9.75 billion last year, according to the consensus forecast prepared by Reuters. Thermo Fisher’s sales are expected to rise another 6.3% in 2009.
Company profits are predicted to rise even faster. The Reuters consensus forecast calls for earnings (excluding exceptional charges) to jump 17.7% to US$3.12 per share in 2008 compared with US$2.65 per share last year. Reuters predicts another 15.4% jump next year to US$3.60 per share. “We see continued solid growth within each of Thermo Fisher’s end markets of life sciences, health care, industrial and environmental,” concludes a Standard & Poor’s Corp. report published on March 29.
> Aecom Technology Corp. of Los Angeles is a diversified provider of professional and technical services for large-scale infrastructure projects. Although it’s been in business since 1980, it went public only last May on the New York Stock Exchange at US$20 a share.
About 28% of AECOM’s revenue during the first quarter ended Dec. 31, 2007 were derived from environmental projects such as water and wastewater treatment facilities in Chicago, New York and Hong Kong. This ratio will soon increase.
In February, AECOM announced that it had reached a deal to acquire Earth Tech Inc., a professional services firm with revenue of US$1.3 billion in 2007. The $510 million transaction is expected to close before June, after AECOM divests up to US$200 million worth of Earth Tech’s assets. About 60% of Earth Tech’s sales pre-divestiture involved environmental projects such as wastewater plants and watershed management.
Jackson Turner, an analyst with New York-based Argus Research Co. , estimated in his March 13 report that AECOM’s earnings in 2008 will reach US$1.33 a share, up 15.7% from US$1.15 a share last year. He expects the company’s earnings will continue growing at an average 13% for the next five years. Turner believes AECOM is well-managed, focused and, thanks to its long history as a successful private firm, well positioned to bid on the rising number of global infrastructure deals.
@page_break@“We expect the strength of AECOM to become clearer to investors as 2008 unfolds,” he writes, “and look for the shares to resume their post-initial public offering climb toward the US$40 mark.” Turner does not provide an estimate for AECOM sales. However, the consensus forecast by Reuters calls for AECOM revenue to jump 18.6% to US$5.03 billion in fiscal 2008, ending Sept. 30, compared with US$4.24 billion in fiscal 2007.
> Valmont Industries Inc. of Omaha, Neb. controls roughly half the global market in mechanized irrigation systems — a product line that accounted for 26% of the company’s total revenue last year.
Nicholas Heymann, the New York-based analyst for Sterne, Agee & Leach Inc. of Birmingham, Ala., rates Valmont a “buy” in part because this niche is driving the company’s overall growth. Valmont also sells utility poles, traffic lights and other systems to governments.
However, Heymann predicts in his March 27 report that sales of irrigation products will jump 32.5% to US$516 million in 2008 compared with US$389 million last year.
That’s more than double the rate of growth for Valmont’s other business units. For the company as a whole, Heymann estimates sales will reach US$1.75 billion in 2008, up 17.1% from 2007. He projects earnings will jump 24.3% to US$4.55 a share in 2008 vs US$3.66 a share last year.
Record grain prices have helped to push up farm incomes, especially in North America. This, in turn, has been a catalyst for sales of mechanized irrigation systems, which are considered 50% more efficient than flood irrigation — the most common system used in developing countries.
Heymann believes Valmont will play a leading role as a supplier when countries in the Middle East and Asia convert to mechanized irrigation systems. Valmont already manufactures the gear in Brazil, Spain, South Africa and the United Arab Emirates and has distribution centres in Australia and China.
“We expect demand for mechanical irrigation systems to remain robust due to low global grain stocks, combined with a global food shortage and water scarcity,” Heymann says. IE
Water-tech sector a way to pump up portfolio
Although it’s still early days for water-related technology companies, opportunities are increasing
- By: James Bagnall
- April 29, 2008 October 31, 2019
- 09:30