Insituform: Piping Potential

07/18/2003 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

In  The Utility Forecaster, Roger Conrad follows a variety of utility sectors, such as water, energy, and telecom. His highest risk--but highest potential--picks are found in the "aggressive" section of his portfolio. His latest feature is Insituform, an indirect play on the water sector.

"Insituform (INSU NASDAQ) is an aggressive play on the need for drinkable water. Founded in the early 1980s, Insituform is the global leader in trenchless repair of sewer, water, and other underground piping systems. The company’s signature product, at 70% of revenues, is a cured-in-place process to repair cracks and leaks from the inside of pipes. The company licenses the process and works through regional units in the US, Europe, and Latin America.

"Given the cost-effectiveness of repairing without digging, Wall Street estimates of future mid-teens profit growth could easily prove conservative. But with Washington loosening environmental regulations and the economy weak, first-quarter profits and sales grew only 7.6% and 10.9%, respectively, and could slow further due to low backlog. Happily, at only 1.5 times book, less than 13 times earnings, and 30% off its 52-week high, the stock is hardly frothy. Finances are solid with debt at just 23% of assets and operating cash flow at seven times capital expenditures.

"In recent trading, the stock’s surge reversed, as the company warned that second-quarter earnings would lag expectations on poor results from a new acquisition. As expected, the company has suffered from the weak economy, which has slowed vitally needed remediation in water infrastructure. But with very low debt, a proprietary process that precludes the need to dig for repairs and still on track for modest earnings near term, the stock's still an interesting bet. As with any tech company, someone may develop a better mousetrap. And with no dividend, you’re not being paid to wait. But patient risk-takers can buy Insituform up to 18."

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