Consolidated: The Top Play in the Water Sector

09/17/2019 5:00 am EST

Focus: UTILITIES

Ben Reynolds

CEO, Sure Dividends

Water is one of the basic necessities of human life. Life as we know it cannot exist without water. For this simple reason, water may be the most valuable commodity on Earth, asserts Ben Reynolds, dividend and growth expert and editor of Sure Dividend.

It is only natural, then, for investors to consider purchasing shares of the companies involved in water. There are many different companies that can give investors exposure to the water business, such as water utilities.

Some other companies are engaged in water purification. In all, we reviewed 40 stocks that are in the business of water. Of those, our top-ranked water stock is Consolidated Water Company (CWCO), which was founded in 1973 as a private water utility in Grand Cayman.

Since its founding, it has discovered a very nice niche for itself in the water business. The company uses a desalination process that helps provide water where naturally potable water is scarce or does not exist.

Consolidated Water has since grown to more than $65 million in annual revenue and a ~$210 million market capitalization. It serves a wide variety of customers in six different countries with 14 plants across its service area.

Consolidated Water reported strong first-quarter results on 5/13/19, including 17% revenue growth and 13% gross profit growth for the period. Earnings-per-share increased to $0.41 per share, nearly tripling from the same quarter last year.

Future growth is highly likely for Consolidated Water. The company won a seven-year bulk water supply agreement from the Water-Authority Cayman, beginning July 1st.

Additionally, the company completed the expansion of the water production and storage capacity of the Abel Castillo Water Works plant in Grand Cayman.

Furthermore, the development of the Rosarito, Baja California, Mexico projects involving the construction and operation of a major seawater desalination plant and distribution pipeline continued to make solid progress.

As the largest potable water producing plant in the Western Hemisphere and a major, much-needed new source of drinking water for the coastal region of Baja California for at least the next 37 years, the project will have a sizable moat around it and provide considerable growth for the company. In all, we expect annual EPS growth of 7% per year over the next five years.

Consolidated Water shares trade for a 2019 P/E ratio of 16.4x, below our fair value estimate of 22.0x. An expanding P/E ratio could boost annual returns by 6.1% per year over the next five years.

Including EPS growth and the 2.4% dividend yield, total returns are expected to reach 15.5% per year. This makes Consolidated Water the top stock for investors interested in gaining exposure to water.

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