Water, Water, Everywhere...

11/15/2002 12:00 am EST

Focus:

Roger Conrad

Founder and Chief Editor, Capitalist Times

"Disaster on the unregulated side of the utility industry has driven the Dow Utility average to lows not seen since the post 1987 crash," says Roger Conrad, editor of The Utility Forecaster. "In contrast, old school utilities – companies that stuck with boring monopoly business – have had a banner year. Reliable earnings, strong balance sheets, and steady dividends have made them safe havens." Here's a trio of water utilities.

"Among our list of regulated and reliable utes, we have three water utility picks. Alone among the utility industries, no one has yet tried to deregulate water, nor is anyone likely to. For one thing, water is extremely difficult to transport, and having rival water pipes running down the same street is laughable. More than power or communications, water is considered a matter of national security, with safety standards increasingly toughening and enforced. Finally, 80% of America’s water is carried by municipal entities, creating a power constituency for monopolies. Each of my water picks is mining a unique stream of profits.

"Consolidated Water (CWCO NASDAQ) is the leading converter of seawater to drinking water in the increasingly parched Caribbean basin, after its recent purchase of systems in four island nations. The deals boost Consolidated’s processing capacity by 276%, hiking sales by 77% and vastly increasing opportunities for growth. With a p/e of just 13, a yield of 3.2%, and a near double-digit growth rate, Consolidated Water is the cheapest water ute around and a compelling buy for growth and income up to 15.

"Philadelphia Suburban (PSC NYSE) has a strategy of acquiring small systems adjacent to its existing properties to gain cost savings and growth, enhancing economies of scale. And it has 55,000 entities delivering water in the US as potential targets. The company is closing in on the purchase of Aquasource from DQE, a deal that will take its acquisition strategy into nine new states, for a total of 15. Now freed of the overhand from Vivendi Environment’s share sale, Philadelphia Suburban is again on the move and is a buy up to 23. The stock also yields 2.6%.

"Southwest Water (SWWC NASDAQ) has also grown by purchasing small water systems. But its preferred strategy is working long-term contracts to serve systems that are still municipally owned. This business is also enormously steady. Since terms are negotiated in advance, contracts are typically renewed and there’s no commodity price risk. Southwest Water, yielding 1.5%, is a bargain at prices up to 17."

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