Water Sweeter Than Champagne

Water may not be as tasty as Champagne, but H2O seems to be creating a lot more excitement on Wall Street. The Street’s thirst for water stocks has driven a number of them, such as Nalco Holdings and Idex, to near 52-week highs.You may not know it, but about 2 billion people on this planet have no access to clean water, and the lack of it is the second-biggest killer of children under age 5. World Bank studies suggest the severe water shortage will grow progressively worse, expanding to more than 2.7 billion people in the coming years, given exploding global population. Water is by no means running out. The problem is more of us are using it.One water bull is Raymond James Financial’s chief investment strategist, Jeffrey Saut, who views H20 as “a great growth play for the future.” His strategy: “Buy water stocks, hold them, and let them run, which is what they’ll do.”An analyst at Los Angeles-based MCR Associates, Carl Lazarus, likens water to oil. “It’s a finite resource, and finite resources, if you’re patient, have nowhere to go but up,” he says. He says his firm has substantial profits on several water stocks, “which we’re not selling now, but buying more on weakness.”One favorite is Nalco Holdings, the world’s largest maker of chemicals used in water treatments and for industrial purposes. The stock is up about 37% in the past 15 months, and Mr. Lazarus figures it could tack on another gain of 20% or so over the next 15 months.One of the latest water pitches comes from Emerging Investments, a New York-based monthly investment letter that’s pushing four names with projected price gains of roughly 40% to 60% over the next two years. They are Watts Water Technologies, Nalco, Tetra Tech, and Idex.The water sector, as Mr. Dorsey views it, ranges from slow-growing utilities to companies providing essential equipment, chemicals, and services that are expanding annually by 20%.Water is a finite resource that not enough people are paying attention to, the letter’s editor, Gregory Dorsey, maintains. For investors, that spells opportunity, he says.Water, he notes, is in growing demand for many reasons, including human consumption, food processing, and a host of industrial applications, including energy production.Here’s a brief look from Mr. Dorsey at the newsletter’s four top recommended water plays.• Watts Water Technologies ($39.27): The company specializes in safety, flow control, and filtration products, and the water conservation markets in North America, Europe, and China. The stock has moved up sharply from its summer 2006 lows, but remains cheap, trading at a price/earnings-to-growth ratio of just 1.3. The stock’s target during the next two years is $60.• Nalco ($24.35): The company holds commanding positions in several segments of the water treatment business, and its products and services are musthave items for the markets it serves, thus ensuring steady sales and income. Nalco, which also holds a leading position in the energy services business (34% of revenues), should expand its bottom line at a 20% clip. Although the company sports a leveraged balance sheet with $3.2 billion in debt and a below investment-grade rating, the company should have no problem servicing that debt, given its cash flow and growth prospects. Two-year price target is $35.• Tetra Tech ($17.76): The nation’s largest water consulting, engineering, and technical services company, it focuses on water resource management and civil infrastructure, an addressable market said to exceed $42 billion. Nearly half of its $1 billion-plus annual revenue comes from the government, with in excess of 30% from the Department of Defense. It generates substantial free cash flow, which, if paid out in the form of dividends, would yield 4.8%. Its backlog grew 18.6% last year to more than $1 billion, a figure that should rise, given the company’s great growth potential in mining and alternative energy, both of which tend to be waterintensive businesses. Earnings are pegged at 75 cents a share this year, upwards of 90 cents next year, and the stock should trade north of $25 over the next two years.• Idex ($50.63): This company produces a broad range of proprietary pumps and machinery products, dispensing equipment, and other engineered products for a diverse global base. In addition to water treatment, Idex’s products are used in such areas as oil refining, liquid natural gas distribution, chemical processing, the food and beverage industry, and medical equipment. In the past year, profits jumped 19%, to $2.48 a share, on sales of $1.16 billion. Look for profits in coming years to climb to a more modest yet still strong 15% to 16% annually. Foreign revenues comprise nearly 43% of the total, so Idex could get a boost from an expected weaker dollar. While not strictly a water company, Idex is worth buying with a two-year target of $68.dandordan@aol.com

Water Sweeter Than Champagne

Water Sweeter Than Champagne

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