In line with our overall pivot toward companies that serve basic needs, we are adding Northwest Pipe Company (NWPX) — a water infrastructure specialist — to our small and mid-cap value portfolio, explains Scott Chan in Investing Daily's The Complete Investor.
Headquartered in Vancouver, Washington, Northwest Pipe is a leading maker of engineered steel water pipeline systems in North America. It sells systems largely for drinking water purposes but also including wastewater and hydroelectric power and other applications.
Northwest Pipe also makes and sells precast and reinforced concrete products such as manholes, box culverts, biofiltration and various other products. The company has 13 manufacturing facilities located across North America, and primarily serves the U.S. market — accounting for more than 90% of revenue.
While the U.S. is still the richest nation in the world, much of our water infrastructure is old and suffers from under-investment in past decades. It is badly in need of repair, replacement, or upgrade, prone to leaks and unsanitary issues.
The most recent federal legislation to address water infrastructure, the Infrastructure Investment and Jobs Act of 2021, earmarked $55 billion over five years to expand access to clean drinking water for Americans. Individual states, too, have also been taking action to fund water infrastructure improvement.
Northwest Pipe serves the large-diameter, high-pressure portion of water transmission systems — the company has nearly 50% of the market share in the engineered steel pressure pipe market. These are typically the connections from a water treatment center to the distribution system or from a source back to the treatment center.
The American Society of Civil Engineers estimates that the average age of drinking water and wastewater pipelines underground is 45 years. A separate report by Bluefield Research says that utilities will need to spend more than $3 billion to repair or replace some 4,700 miles of wastewater pipeline in the years ahead.
Granted, water pipes and sewage drains probably won’t get many people’s heart pumping with excitement, but Northwest Pipe’s products serve critical functions for our country’s equally critical infrastructure, which as noted above, requires tremendous amounts of investments in the years ahead.
Valuation-wise, shares trade at under 10 times expected 2023 EPS, and the price-to-book ratio is right around 1. If Northwest Pipe can keep revenue and margins moving in the right direction — and we think it will — it should gain more attention from Wall Street. A boost in valuation multiples would provide an additional avenue for the stock price to increase besides the company’s own financial improvements.