America's Trouble with Water
Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I had a friend in college who lived in a house with some eco-conscious guys who flushed the house's lone toilet only once a day in order to conserve water. I thought this behavior was not only disgusting, but also inconsequential. How much water can 5 people actually save from a spartan toilet flushing policy? Well, according to the American Society of Civil Engineers (ASCE), we lose 7 billion gallons of water a day just from leaky pipes. I guess it does add up.
In 2009 the ASCE also gave a D- grade to the drinking water infrastructure in the United States. They claim the annual estimated funding shortfall in our water infrastructure is $11 Bil. The American Water Works Association estimates $1.7 Trillion must be spent over the next 40 years to replace current infrastructure and to support population growth. There are loads of cost estimates you can find with some research, but the bottom line across them all is the country must increase spending significantly over the next several decades to avoid possible disaster. The problem exists because the majority of our buried water infrastructure is over 50 years old (some over 100 years old) and has remained untouched or unmaintained. Damaged pipes can lead to contaminated water or even small-scale flooding. A deteriorating water system must be addressed, both from a public health perspective and from a national security perspective. In short, this is an investment that will have to be made. With that in mind, I want to look into a few companies that stand to profit from increased water infrastructure spending.
Northwest Pipe Co. (NASDAQ: NWPX) is a leading manufacturer of steel pipe systems used in a myriad of applications, with water transmission applications accounting for 53% of sales. Management believes the market potential over the next three years for the large-diameter, high-pressure pipes that Northwest Pipe Co. specializes in could reach $1.4 Bil. Sales in their water transmission segment for 2011 totaled $272 Mil. There's certainly room for growth there. A point of concern for me is competition. National Oilwell Varco (NYSE: NOV) recently acquired two major water transmission players, Ameron International and Mueller Water Products, and now directly competes with Northwest Pipe in the western United States and Canada. Public utility projects are very competitively bid with regards to price, and the introduction of a major competitor could really compress margins. Their financial picture is not looking great either, with $88 Thousand in cash and over $80 Million in debt. I would recommend taking a hard look at their liquidity before investing.
Xylem Inc. (NYSE: XYL) was spun off from ITT Corp. (NYSE: ITT) in late 2011 and is a leading provider in equipment and service for water and wastewater applications. The company is more diversified in water infrastructure than Northwest Pipe with products in the transportation, treatment, and testing of water. They are also globally diversified, however, 37% of 2011 sales were in Europe, and the potential for an adverse effect from the Eurozone crisis is a possibility. They do have a strong balance sheet, have already declared a dividend, and generate sufficient cash to fund operations. A final item of interest for me personally is that the President and CEO is a woman. I saw an article recently boasting how history was made because 18 Fortune 500 companies are now headed by women. By my math, that's less than 4%. This is despite the fact that roughly 40% of MBA graduates are women, and research studies have shown companies with more women on their boards tend to earn higher returns on equity and assets, but I must digress. My only hesitation is the company has only been operating independently for a couple quarters. Personally, I'd wait at least a year in order to have 4 quarters of financials to look at, but if they can maintain the same growth they achieved as a segment of ITT Corp, this company has a bright future ahead of it.
On paper this seems like an opportunity screaming its lungs out from the rooftops for our attention. Spending on critical infrastructure cannot be forever kicked down the road. At some point it will come to a head and significant projects will start picking up. I'm going to add these two companies to my watch list to keep tabs on them. Do you have other investing ideas in water infrastructure or have opinions on the companies discussed in this post? Leave a comment below and we'll continue the conversation.
drfrank1 has no positions in the stocks mentioned above. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services recommend National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.