Jubak's Journal
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5 water infrastructure bets
Communities hit by Katrina have too much flood water and not enough clean drinking water. These companies will step in to help solve the problems.
By Jim Jubak
The supply of oil from the Gulf Coast may be more important to the national and global economies, but nothing is more important to the lives of the people who live along that coast than the supply of clean water and the removal of contaminated water.
There's no commodities market, as there is for oil, that sets the price of this water. No headlines in the financial pages track its cost. No experts project supply and demand.
But we all know, from the pictures we've seen of a devastated New Orleans, that in the wake of the destruction wrought by Hurricane Katrina, clean water has become a precious commodity indeed for millions of people along the Gulf Coast.
And we know from these same pictures that as the supply of clean water has become a life-and-death issue for so many victims of the hurricane, the other side of scarcity is an the oversupply of dirty flood water, contaminated with chemicals and fouled with wastes that breed epidemics. It needs to be removed from the cities, suburbs and farmland of the Gulf Coast before the people who call it home can have any chance of rebuilding their lives.
The twin tasks of ensuring a reliable supply of clean water and coping with the flood's toxic aftermath will go on for weeks and months and years. These communities must first cope with the immediate jobs of delivering drinking water and pumping out flood water before settling down to the long, hard, and expensive task of rebuilding their shattered water infrastructures.
Oil and water in the mix
That rebuilding, so necessary for the resumption of something like normal life along the Gulf Coast, will result in new business for the companies that provide pumps, plumbing supplies, and water purification plants and devices. Because this task won't be accomplished overnight, companies in the water sector will see increased growth for quarters to come. And because water isn't nearly as photogenic as oil, and hasn't grabbed nearly the same number of headlines as gasoline, the stocks of companies in this sector haven't run up as quickly in the wake of Katrina, and haven't fallen back as far as the worst fears have proven groundless.
For my Sept. 7, Wednesday morning appearance on CNBC's "Morning Call" I made three water-sector "Katrina" picks.
Pentair (PNR, news, msgs) has finished its transformation from an unfocused industrial conglomerate to a company specializing in just two markets: security enclosures (about 30% of sales) and water-purification and transport equipment (about 70% of sales). Before Katrina, management was forecasting 6% to 10% annual long-term organic growth (that's before acquisitions) from the water business (and 5% to 8% annual growth from security enclosures). But post-Katrina those estimates are likely to be low, especially since the company's water filtration system, which has been Pentair's weakest performer, is precisely the unit that could get the biggest boost from Katrina cleanup efforts. The stock took a hit when management cut its second-quarter earnings projections, but the stock now looks like it has hit bottom and is on its way to breaking above its 50-day and 200-day moving averages. The company's pump division should also see sales higher than its original estimates. The stock is reasonably priced at 19 times projected 2005 earnings, with Wall Street estimating almost 50% earnings growth in 2005 and another 18% growth in 2006. (Pentair was a pick in my Jubak's Journal portfolio on May 20, 2005 at $43.60.) Our StockScouter currently rates the shares a 4 out of a possible 10.
More from MSN Money on CNBC.com
I.T.T. Industries (ITT, news, msgs) is another conglomerate with a big presence in water, although in this case the company's other major business segment is defense rather than security. I.T.T. Industries is the world's largest maker of pumping and water treatment systems. The company's fluids segment accounted for about 40% of its sales in the second quarter of 2005. In that quarter, sales in the company's water business grew by 10.5% on increased orders from its industrial and construction customers. But the gem for the company, especially after Katrina, is the wastewater unit. That segment of the water market was already looking at the need to invest $250 billion over the next 30 years to replace old equipment and another $40 billion to upgrade equipment to meet new environmental standards. Taking into account the company's expertise in the water disinfection market, I'd project that it should be able to grow sales in its water business at an 8% to 9% rate over the next year or two. The shares trade at a multiple of 20 times projected 2005 earnings. Wall Street is currently estimating 19% earnings growth in 2005 and 14% growth in 2006. Our StockScouter rates these shares a 6 out of a possible 10.
Hughes Supply (HUG, news, msgs) distributes just about everything anyone would need to rebuild anything from a building to a municipal water or electrical system. The company distributes more than 350,000 products to customers that include water, plumbing, electrical, and mechanical contractors; public and municipal utilities, and industrial companies. The stock rode the residential and commercial construction booms in 2004 but has pulled back in 2005 on fears that growth was slowing in those areas and on weakness in the plumbing and heating/air conditioning segments, which showed a 1% decline in organic sales in the most recent quarter. Management made a number of moves before Katrina designed to get profit margins up, and those moves should work even better as post-Katrina rebuilding creates added demand. I'd expect the added business to push earnings growth for the fiscal year that ends in January 2006 well ahead of the 6% that Wall Street now expects and to add to the 18% earnings growth projected for the next fiscal year. The stock now trades at 15.5 times projected fiscal 2006 earnings per share. Our StockScouter rates these shares a 10 out of a possible 10.
Exclusive picks
As always, I also have two more "exclusive" picks for the readers of MSN Money on CNBC.com.
Layne Christensen Company (LAYN, news, msgs) signed a letter of intent to acquire Reynolds, a private company in the water business, at the end of June. Reynolds' focus on the design and building of water and wastewater treatment plants, installing water and waste pipes, sewer rehab, and well drilling should push sales in the company's water division to approximately $350 million by the end of fiscal 2006. The water segment then would account for about 50% of company sales. Not that the company's other business -- mineral exploration (and which includes 560 drilling and well service rigs) -- did too shabbily in the second quarter. While revenue for the company as a whole grew by 23%, sales in the mineral exploration segment grew by 27%. The Wall Street consensus now projects 43% earnings growth for the fiscal year that ends in January 2006 and 14% for fiscal 2007. The stock trades at 22.5 times projected fiscal 2006 earnings per share. Our StockScouter rates the shares a 5 out of a possible 10.
IDEX (IEX, news, msgs) designs and manufactures pumps, compressors and valves -- the unit that most interests investors in the post-Katrina rebuilding period -- along with fluid dispensing systems and rescue tools. Pump division sales weren't doing too badly before Katrina: In the second quarter they climbed to just shy of $160 million, an 18% increase on 12% organic growth. Operating margins of 17.9% were 0.6 percentage points better than in the second quarter of 2004. The Wall Street consensus currently projects 22% earnings growth for 2005 and 15% growth in 2006. The shares sell for 21 times projected 2005 earnings per share. Our StockScouter rates these shares a 7 out of a possible 10.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He doesn't own short positions in any stock mentioned in this column.
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