4 water companies that can win big with federal spending

4 water companies that can win big with federal spending

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California's drought highlights issues in water management, as our aging water infrastructure needs an upgrade.

Over the weekend, a much-awaited storm brought momentary relief for Northern California’s drought woes. The Bay Area received 2 to 11.71 inches in its first significant rainfall in 14 months. The region averages 14.5 inches of rain during the season, but California’s drought, now in its third year, has made the state the driest it has been in 500 years.

Governor Jerry Brown declared a state of emergency last month and called upon residents to limit their water usage. The US Drought Monitor placed almost 10% of the state in the exceptional drought (D4) category, which only applies to rare and severe dry spells. Nearly 98% of the state is abnormally dry, and reservoirs are at historic lows. Furthermore, conditions are so harsh that seventeen of the state’s rural counties are expected to run out of water in 50 to 90 days.

US Drought Monitor California 02042014Source: US Drought Monitor

Working on water in Washington

Members of the federal government are seeking ways to address California’s dwindling water supply. In a move criticized by many Democrats, including Governor Brown, California Senators Barbara Boxer and Dianne Feinstein, and President Obama, House Republicans sponsored and passed a drought bill last Wednesday.

Known as the Sacramento-San Joaquin Valley Emergency Water Delivery Act, the bill isn’t expected to make any headway in the Democrat-controlled Senate where Senators Boxer and Feinstein are working to bring forth their own version of drought legislation.

California’s water shortage is only the latest water-related challenge facing the US. The viability of the nation’s aging water infrastructure remains a major concern for the Environmental Protection Agency (EPA):
 

 

 

The EPA’s Clean Water State Revolving Fund (CWSRF) and Drinking Water State Revolving Fund (DWSRF) are set to receive $1.4 billion and $907 million respectively from the latest Congressional omnibus spending bill. The CWSRF offers loans to states to pay for water quality protection projects, while the DWSRF provides grants for modernizing drinking water systems.

Read more: 3 Undervalued Plays in Water Stocks

Additionally, the spending bill provides $5.5 billion in water infrastructure projecting funding to the Army Corps of Engineers. Unlike the EPA, which focuses on drinking and wastewater, the Corps handles issues related to ecosystem restoration, flood risk management, hydroelectric power generation, and other water-related areas.

In total, Congress is giving $7.8 billion to help fund improvements to the nation’s water infrastructure. The critical nature of the upgrades places water companies in a unique position due to the integral role their products and services play in water systems operations. This inspired us to look for investment opportunities among these companies.

Investing ideas

To begin, we constructed a universe of water companies listed on the S&P Global Water Index and Calvert Global Water Fund. We then narrowed down that list to stocks based and operating in the US, as we’re interested in companies that will work in some capacity on domestic projects.

Next, we screened for earnings per share (EPS) growth quarter over quarter of 25% or higher. Growth of that nature is considered high and viewed as a positive sign by investors. We wanted to see if that growth was part of an encouraging trend, so we then screened for firms with EPS growth this year of 25% or higher.

For our last step, we cut down our list of water stocks by screening for a low price to sales (P/S) ratio. A P/S ratio is a valuation metric that compares a stock’s price to what the company generates in revenue. When a company has a low P/S ratio, it means that its price is cheap in relation to the company’s revenue. For this list we screened for stocks with P/S ratios under 2, which means that the company’s market cap isn’t greater than 2x its annual sales.

We were left with four water stocks on our list.

Click on the interactive chart below to see sales data over time.

Do you think these water companies will continue to report such high EPS increases? Use this list as a starting point for your own analysis.

1. PICO Holdings Inc (PICO, Earnings, Analysts, Financials): Engages in the water resource and water storage, real estate, insurance, and agribusiness businesses.

Market cap at $553.66M, most recent closing price at $24.34.

EPS growth quarter over quarter: 212.50%. EPS growth this year: 61.40%.

P/S: 1.59.
 

2. Mueller Water Products, Inc. (MWA, Earnings, Analysts, Financials): Manufactures and markets a range of water infrastructure, flow control, and piping component system products for use in water distribution networks and water treatment facilities in the United States and Canada.

Market cap at $1.36B, most recent closing price at $8.63. 

EPS growth quarter over quarter: 233.30%. EPS growth this year: 833.30%.

P/S: 1.22.
 

3. AECOM Technology Corporation (ACM, Earnings, Analysts, Financials): Provides, with its subsidiaries, professional technical and management support services to government and commercial clients worldwide.

Market cap at $2.76B, most recent closing price at $28.69. 

EPS growth quarter over quarter: 137.60%. EPS growth this year: 551.90%.

P/S: 0.34.
 

4. Pentair, Inc. (PNR, Earnings, Analysts, Financials): Operates as a diversified industrial manufacturing company worldwide.

Market cap at $15.16B, most recent closing price at $76.55.

EPS growth quarter over quarter: 159.50%. EPS growth this year: 411.90%.

P/S: 1.98.

 

 

(List compiled by Mary-Lynn Cesar. Quarterly sales data sourced from Zack's Investment Research. All other data sourced from Finviz.)

 

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