H-2-Oh!

04/30/2004 12:00 am EST

Focus:

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

"There's a war for resources in the offing, and water is at the center of it all," says Neil George in Personal Finance. "While the earth has about 300,000 cubic miles of water, less than 10,000 are suitable for human consumption." Here's how to invest in H2O.

"As nations start moving from third to second- or first-world status, expanding agricultural, hygienic, and consumer demand means increased water consumption. While global demand grows, we're destroying more and more of our fresh water reserves. The real way to profit from the water factor is to get on board the companies that not only provide fresh water, but also treat contaminated water for increased demand. And, of course, they must have reserves. Most of these companies aren't US-based. But if you're willing to look at the biggies behind the tap, investing in these global water players should position you well for one of the biggest, lesser-known plays out there today.

"The Mecca of water is Paris, home to three of the biggies in the water world. First is Suez (SZE NYSE). The company has been around since France was in Egypt and was one of the lead contractors in building the Suez Canal. And even after Waterloo, it continues to operate on a global scale. Through development of its own water and other resource and energy businesses and acquisitions it's built itself into one of the world's biggest water and energy companies. It now operates on all continents and dominates its locally controlled water markets. Yet while it's the king, it still trades like a pauper at a mere 0.4 times trailing revenues. The reason is simple: Most investors aren't fully aware of its true assets. Buy up to 22.

"Next is Veolia (VE NYSE), a water company like Suez that predates Napoleon. Having been spun off from media and utility conglomerate Vivendi, Veolia has changed its name to reflect its true business. And that business is providing water and water services in more than 100 nations to hundreds of millions of customers throughout the globe. Like Suez, Veolia has been refocusing its business after the break up of media assets, and now it has to make investors aware of its existence and its assets and revenues, which have been climbing at swift paces recently. Yet it's still trading at huge discounts. A bargain buy, Veolia, should be tapped up to 30.

"Last in Paris is Bouygues (BOUYF Other OTC), which through its Saur unit operates water and water treatment facilities in almost as many markets as Veolia. And like its peers, it's cheap and will keep pumping its own water and treating what's sent for years and years to come. Sales are climbing, with margins and profits accelerating at even faster paces. Yet Bouygues trades at a discount to revenue at more than 60%, making it a buy below 30.

"
For the last big purveyor of water and water treatments we need to cross the Maginot Line to Essen, Germany where RWE (RWEOY Other OTC) is headquartered. We've been writing about this global resource giant for years; it owns some of the best in oil, gas, coal, electricity, and water. Armed with its base in Central Europe, RWE has been on the prowl for water, all while most of its peers were asleep at the wheel. The company is finally getting noticed, but mostly for its oil. Yet as more and more in the market figure out that water is what we really need, RWE will be less of a bargain than it currently is. Trading for half the value of trailing sales and paying a nice 3.2% dividend yield, RWE is a buy up to 50.

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While not cheap, if you want to own a local US water company, it should be Northeastern-based Aqua America (WTR NYSE). It operates in more than a dozen states and draws water from both its own rights and those based on long-term grants and contracts. But this comes at a great expense- it trades at a whopping over five times trailing sales. Aqua America is a buy compared to its US peers, at prices up to 20.

"Meanwhile, we'd point out that most of the world's water is salty. Consolidated Water (CWCO NASDAQ) operates reverse osmosis to make salt water potable in tourist-rich islands in the Caribbean. It's valued as expensively as Aqua America, but will only get more so as fresh water becomes more scarce. Consolidated Water is a bit of a speculative buy up to 20.

"Finally, bottled water commands a thirsty market as well. While Coca-Cola and Pepsi have their hands in this game, Nestle (NSRGY Other OTC) is king in the bottled-water business. The company controls key brands that dominate global bottled water including Perrier and San Pellegrino, Arrowhead, and many others, Nestle not only owns water reserves in Europe, but around the globe. And it's well versed at catering to local market needs- from the first tier to the bottom tier. And what's more, you also get a great collection of food and consumer goods. Nestle is a buy up to 70."

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