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Water Brings a Flood of Opportunities
05/01/2007 12:00 am EST
Keith Fitz-Gerald, editor of The Skeptical Investor, says water is becoming an increasingly scarce—and valuable—resource, and offers several ways investors can profit from it.
Water is central to our existence. Not only do we need it for basic consumption; we rely on it for all kinds of industrial production and for medicine. Water is a critical element in health care and, most importantly, disease reduction. In short, we need it to live.
Danaher (NYSE: DHR) is among the leaders of a short list of companies that can provide both instruments and disinfection systems to cities and governments facing skyrocketing clean-water demands, and their equipment is used to process literally billions of gallons of water in 35 countries around the world.
In just the past year, sales advanced a whopping 17.5% to $2.66 billion. The company maintains a careful perspective with regard to its investors, returning a remarkable 25% to shareholders annually over the past 20 years. [It has] a market capitalization of $24 billion, revenues of $9.6 billion, and 45,000 employees around the world.
I think that DHR’s growth rate will be conservative as water challenges intensify. Buy DHR under $75. (It closed at around $71 Monday—Editor.)
Pall (NYSE: PLL) [also] is an aggregation of business units operating in five segments, including medical materials, biopharma, industrial, aerospace, and microelectronics. Whereas DHR is all about instrumentation, Pall is about separation and filtration solutions. Much of their business is designed to provide a comprehensive approach to contamination control.
Pall has really stepped up to the plate in India, China, and Singapore to match their emergence as biotech and pharmaceutical manufacturing bases. This is significant because either of these things requires ultrapure water. To that end, Pall is making sure there are labs offering a wide range of services for qualification, optimization, and validation of testing.
In the future, the company also plans to build what it calls “Centers of Excellence” to address life science activities for all of Southeast Asia. Pall sports revenues of $2.0 billion, so it’s smaller than DHR. However, it’s generated a nice 13.71% return on equity. Quarterly revenue growth year over year is a whopping 72%, and 81.30% of the company is held by institutions, so the serious money has bought off on them, which is always something I like to see.
Buy Pall under $42. (It closed just shy of $42 Monday—Editor.) The dividend yield at 1.2% is lower than I like, but the appreciation potential in light of a trillion-plus dollars getting ready to tackle the water problem globally offsets this in my mind.
If ETFs are more your speed, take a good look at PowerShares Water Resources (AMEX: PHO). It’s not quite the focus on global initiatives that Pall and DHR represent, but is instead a broader market play that includes water providers, purification companies, and even so-called “green” companies involved in water-related testing and inspection. The portfolio is based on the Palisades Water Index, which is a portfolio of 25 stocks that are rebalanced quarterly. It tends to favor smaller, more aggressive companies, and that introduces a bit of volatility. Management fees are 0.60% a year, making it a little more expensive than pure utility offerings or other ETFs, but with such a strict rebalancing schedule, that makes sense. Buy PHO up to $21. (It closed at about $19.50 Monday—Editor.)
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