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Dousing the
competition
Little-tracked water stocks
beat indexes over two decades
SANTA MONICA, Calif. (CBS.MW) - People don't often appreciate how
invaluable a resource water is. The typical American lunch of
hamburger, fries and a soft drink, for instance, takes 1,500 gallons
of water to produce.
Now munch on this: Water company stocks have outperformed most
U.S. stock market indexes over the past 20 years, but it seems Wall
Street is only just now taking notice.
"Water is hot," said John Dickerson, who runs the only water
investment partnership in the country, Summit Water Investors in La
Jolla, Calif. "But it's probably the most misunderstood and
underinvested industry around."
In part, that's because the water industry is fragmented. There
are municipal utilities, industrial water supply and treatment
companies, technology and equipment suppliers, consumer water
product suppliers, and water as a commodity.
Various ways to play
As such, Wall Street doesn't cover water as a specific industry
and there are few vehicles for people to invest in water besides
individual company stocks.
"There is a list of only about 20 to 25 names and that includes
the global companies," said Debra Coy, a senior analyst for water
industry and environmental policy at the Schwab Washington Research
Group in D.C.
Yet some of those names have outperformed most other stocks and
the major indexes over the last 20 years. The largest U.S. water
utility, American Water Works (AWX:
news,
msgs),
has posted a 20.9 percent annual return since 1980, compared with
17.1 percent for the Dow Jones Industrial Average and 16.6 percent
for the Standard and Poor's 500 Index. Another leading utility,
United Water Resources (UWR:
news,
msgs),
returned 18.6 percent annualized of over the same period.
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"Municipalities are realizing they will have to
face those costs, so they are turning to private
companies."
Debra
Coy,
Schwab &
Co. |
A water stock index that Coy developed for Charles Schwab &
Co. is up 10.4 percent this year through Sept. 20. That's a strong
showing considering the S&P is off about 1 percent and the Dow
is down 7 percent.
The water industry's growth is being driven by a movement toward
privatization of water utilities in the U.S., environmental issues
and consolidation.
Only 15 percent of Americans get their water from a private
company, Coy said. But that may change. Small towns and
municipalities need to upgrade their water infrastructure to meet
Environmental Protection Agency guidelines and provide clean,
potable water to consumers. The EPA estimates the cost of those
upgrades to be $1 trillion over the next 20 years.
"Municipalities are realizing they will have to face those costs,
so they are turning to private companies," Coy said. And while
privatization of water utilities has been slow to catch on, she
said, it's now gaining steam.
"And water has a better business model" than many recently
privatized industry, and it's the only utility vital for life
itself, Dickerson said.
Captive audience
Water companies also are monopolies in many cases, he said. "You
could charge whatever you want," but few do. In fact, water is so
cheap that most consumers don't even notice price increases, he
said.
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Foreign
companies
"view the U.S. as virgin
territory."
Debra
Coy |
And the $400 billion a year U.S. water industry is starting to
get attention from foreign investors, Coy said. European companies
especially are dipping their toes into the market by snapping up
water utilities.
French conglomerates Vivendi (V:
news,
msgs)
and Suez Lyonnaise (SLEDF:
news,
msgs)
and British conglomerates Thames Water and Kelda Group are all
gaining footholds in the U.S. market. Vivendi is splitting into two
companies, one focused on its media properties and the other on its
service businesses like water suppliers.
Foreign companies "view the U.S. as virgin territory," Coy said.
"European water companies are going to become more and more familiar
to U.S. investors if they're not already."
Coy noted that most of the more than $15 billion worth of water
company acquisitions announced last year were made by foreign
companies.
Industry consolidation
And the opportunity to further consolidation is almost limitless.
There are 58,000 water utilities in the U.S., 90 percent of which
serve less than 4,000 homes with annual budgets of less than $2
million. Yet this is an industry where it's far more efficient to
have one supplier service many homes, analysts said.
Going forward, Coy and Dickerson expect to see consolidations of
utility companies continue along with water companies making
acquisitions in areas like filtration and bottling to create giant
holding companies servicing everything from dams to toilets.
Over the next two decades, water use by humans is projected to
increase 40 percent, and water demand by food-related agriculture is
expected to increase 17 percent.
Aside from buying individual stocks, there are two ways people
can invest in a diversified mix of water stocks: Dickerson's Water
Investors L.P., or a small Sante Fe, N.M.-based mutual fund called
The Water Fund, an investment vehicle of philanthropist Andrea
Mellon, who only invests her money in socially conscious ways.
Thomas Kostigen writes for
CBS.MarketWatch.com.
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