Playing With Water

At the Ojai retreat, Raymond James’ Jeff Saut offered up that potable water--and the companies that facilitate the supply of this commodity--should be the object of investors’ attention.

I had heard Jeff's views before, but a quick search for water plays came up . . . um . . . dry? (yeah, I know that's a bad one). With the family off doing their thing over the weekend I took my Bloomberg for a trip around the world on a more focused expedition. Here is what I came up with.

In the U.S. most of the pure water-play companies--such as Ionics (ION)--have already been bought out. There are a number of outfits with a heavy presence in the water industry, but they also carry along other businesses:

• Pall Corp. (PLL): Perhaps the most obvious name within the group, it provides filtration and separation processes for water and other fluids. It also has a presence in the life sciences area. Results this past quarter were less than stellar, mostly because of cost pressures. But the water and “biotech” sectors showed good top-line growth. At 21x the just finished 2005 FY, the stock trades exactly at its historical multiple. FY 2006 and 2007 EPS should show 16% and 22% growth. The balance sheet is in fine shape (the debt is rated A- by S&P) and PLL has generated free cash for 9 of the last 10 quarters.
  
  
• Nalco Holding (NLC): PLL’s weaker sibling, in my opinion, is much pricier at 33x 12/05 EPS est. of $0.55. The company addresses more the “water in the ground” areas (drilling, pumping, etc.). As in PLL’s case, Q2 was also hurt by raw material costs. There are big expectations for FY ’06, with estimates of $0.95. With its exposure to the volatile energy industry and raw material prices, I view the consensus number as very much subject to change. The $3.4 billion of debt on the balance sheet is not a problem--until it is.
  
  
• Layne Christensen Co. (LAYN): Here is a household name for you. Its water biz can best be described as a hybrid of PLL’s and NLC’s. The “hitting on all cylinders” performance – just check out the chart – comes with a PE of 32x last year $0.77 EPS, for expected growth rates of 40% in FY ’06 and 16% in ’07. The consensus is of a whopping three analysts, so it’s probably safe to allow for “variance” either way. Clean balance sheet. The company reports this coming Wednesday.

As Bugs Bunny would say “that’s all folks” as it pertains to names trading in the good old USA. There are other shops more or less involved with water - Calgon Carbon (CCC), Consolidated Water (CWCO), Tetra Tech (TTEK), and Insituform (INSU) – but each has its own set of issues to which attention must be paid.


For two true pure plays, Minyans must hop to Japan and Singapore.

• In Tokyo you will find Kurita Water Inds. (6370 JP on the Bloomberg). With the caveat that I have no clue how reliable estimates are for Japanese companies, Kurita’s EPS growth rates for Mar ’06 and ’07 are 20% and 6% respectively. Big deal you say, but the company has not even scratched the surface of the Chinese opportunity, and if you believe in the “secular” nature of the water play . . . let’s just say that there are a lot of Chinese in China. I urge you to check out their fresh-off-the-presses Annual Report.  It has a lot of good information, but most importantly it shows the “pure” water-play nature of the company.
  
  
• Singapore is home for Hyflux Ltd. (Bloomie HYF SP). This is another focused play, but much smaller in size than Kurita. The upside for HYF is that it’s only just beginning to ramp, and if its order book is any indication, ramping they are. The 5-sec. analysis of this company is that it comes with the inevitable growing pains of a small fast grower – not least of which is a balance sheet which may require more financing for working capital. Unfortunately, unless you speak “Singaporese” the company’s website is gonna be a tough read.
  

In the footnote category, Canadian company Zenon Environmental (Bloomie ZEN CN), is where I want to be products wise, but from the performance of the last four quarters it looks like an operational train wreck.

As always Minyans this is not advice. Embracing Jeff Saut’s view of the long-term nature of the “water” opportunity, I am inclined to time my entries opportunistically, as reflected by my current positions. 

Should be a fun week; as Toddo often says . . . “be the ball”.