Water, Water, Everywhere-Ideas In Water Infrastructure & Beyond
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“Water, water, every where,
Nor any drop to drink.”
The Rime of the Ancient Mariner
by Samuel Taylor Coleridge
The devastation wrought by Hurricane Sandy brought to life the sad irony of this famous verse with millions of people inundated by a flood of water, yet struggling for the basics necessities of life. We humans, and indeed all living creatures, must have water to survive and this condition creates an everlasting demand for water. The supply of water is critical and therefore investment research ideas based on a water theme are abundant. After presenting some water utility and transportation ideas in this previous post, my analysis of the water theme continues now with a look at several infrastructure, water meter, and agriculture companies.
Water related businesses that make and sell pumps, pipes, and filters, the so-called water infrastructure sector, includes companies like Xylem (NYSE: XYL), Mueller Water Products (NYSE: MWA), and Gorman-Rupp. While these companies are similar in both their dividend yields and payout ratios, they are very different in their growth profiles and PEG ratios. Dividend yields range from 1.4% for Mueller Water to 1.5% for Gorman-Rupp and 1.6% for Xylem. Similarly, dividend payouts have a tight range of between 20% for Gorman-Rupp and 25% for Mueller Water. Xylem is in between with a 21% dividend payout ratio. Given these relatively low yields and payout ratios, the water infrastructure sector clearly does not share the investment income attributes of water utilities.
The PEG metrics for these companies offer stark contrasts for investors which is fortunate given how similar their dividend metrics are. Mueller Water has the most attractive PEG ratio at just 0.31, well below a standard 1.0x to 2.0x rule of thumb. However, this ratio is being skewed by the 59% estimated EPS growth as the company returns to positive income after discontinuing some losing operations. Because it has had several years of losses and is in a restructuring phase, I would avoid Mueller Water for now. Xylem and Gorman-Rupp both have reasonable PEG ratios at 1.6x and 1.3x, respectively, but Xylem’s PEG ratio is nearer to the high side of my desired PEG range than Gorman-Rupp. Despite being relatively more expensive, Xylem is preferable over Gorman-Rupp for further research given the $4.6 billion market cap of Xylem compared to just $600 million for Gorman-Rupp.
Other water related sectors include water meter makers and agriculture equipment companies. Two water meter companies to consider are Badger Meter (NYSE: BMI) and Itron Corp. (NASDAQ: ITRI) while Lindsay (NYSE: LNN) makes irrigation products for the agriculture industry.
In the water meter space, Itron is the larger player with a market cap of $1.5 billion but Badger Meter, with a market cap of only $600 million, is the better candidate for research with estimated EPS growth of 12% and a PEG of only 1.5x. Itron’s PEG is not a meaningful measure as the company recorded a GAAP net loss last year while consensus non-GAAP EPS is estimated to turn positive in 2013. I am also more interested in researching Badger Meter because it comfortably pays a 1.6% dividend yield with a 30% payout ratio while Itron does not pay a dividend.
Finally, Lindsay Corp., with a market cap of $1 billion, makes irrigation products that allow the agriculture industry to boost its yield through efficient water usage. Lindsay is estimated to increase its EPS by about 10% and has a mildly attractive PEG of 1.7x. This multiple is closer to the high end than the low end of the desired PEG range but Lindsay’s modest dividend yield of 0.6% and low payout ratio of 10% compensate, at least partially, for this. I also like the fact that Lindsay serves customers with relatively low economic sensitivity which tends to produce more stable results for Lindsay than would other more economically sensitive companies.
We drink water, bathe in it, grow & prepare food with it, and even use it for transportation and recreation. There are many, many other water related companies and segments that investors can begin to investigate. These two posts offer a very brief analysis of just a few water related companies and should be only the first step to more exhaustive analysis.
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