Big Profits in Clean Water

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Water is a vital ingredient for human life. Companies that help ensure that there is enough clean water look increasingly important, which means they could be increasingly good investments.

Clean Water

The United States is blessed with many things. An important one is clean water. Not only do we have plentiful supplies of potable water, but we have the systems in place to safely deliver that water to homes and offices in even the most remote locations. This isn't the case in every country, particularly those in the emerging markets.

This fact, coupled with growing populations, means that drinking water could be an increasingly contentious issue. Imagine the benefit to the world if a company was able to solve the drinking water issue. Imagine the profits that could be made, too.

While we aren't at the point of a solution, yet, there are a handful of companies that have exposure to the water market that are interesting investment options. While the water utilities often make the grade on this count, companies involved in filtration and piping are far more compelling. For example:

Pall Corp. (NYSE: PLL)

Pall is a supplier of filtration, separation, and purification technologies. Its filters remove solid, liquid, and gaseous contaminants from liquids and gases. The company's Life Sciences and Industrial business segments have worldwide operations.

The Life Sciences group is focused on the medical and food/beverage markets while the Industrial business targets the process technologies, aerospace, and microelectronics markets. While the company doesn't specifically target drinking water, its filters effectively make water, and other liquids and gasses, pure enough to use in other applications.

Pall's top and bottom lines have been a little variable since the 2007 to 2009 recession, which isn't surprising based on its industrial focus. However, the company has a good position in its market and its filters are consumable products, resulting in material recurring sales. Unfortunately, the market appears well aware of the company's solid business and the shares look to be fully valued. However, this is a stock to keep on your watch list for a pullback.

Xylem (NYSE: XYL)

Xylem was spun off from ITT in late 2011. The company is, effectively, made up of ITT's water equipment and services businesses. Its products address “the full cycle of water, from collection, distribution and use to the return of water to the environment.” Xylem breaks its business down into two segments, Water Infrastructure and Applied Water.

The Water Infrastructure group focuses on the transportation, treatment, and testing of water. Products include pumps, and treatment and testing equipment, among others. The Applied Water group targets the residential, commercial, industrial, and agricultural markets. Products include pumps, valves, heat exchangers, controls, and dispensing equipment.

Like Pall, Xylem is a global business with a solid recurring revenue stream. Notably, however, the company's operations put it in closer contact to the drinking water cycle than Pall. Like Pall, however, the company appears fully valued. That said, if it should fail to reach its aggressive profitability targets, a sell off could make Xylem a drinking water bargain.

An Outsider

Another company to look at in the water filter space is Lockheed Martin (NYSE: LMT). Yes, the company is a defense contractor, but Reuters recently reported on a technological advance that Lockheed believes it has made in filtration. The new technology could make it a big player in the water space.

This shouldn't come as a surprise, however, because water is a vital asset in the military and one of the hardest to procure and transport. Creating a system that would allow local water sources, including salt water, to be reliably tapped in a conflict is right in line with Lockheed's larger business.

Lockheed's discovery is a reverse osmosis filter that would materially reduce the cost of desalinating salt water. It hasn't yet figured out how to bring the product to market, but it believes the finding is very promising. The military funding issues spread across the headlines have kept this industry giant's shares relatively depressed, which could be a good thing for investors. With a yield around 4.5% the shares could be of interest to income investors willing to look for a water play in an odd location.

Water on the Brain

Water isn't something most U.S. investors think about much and, frankly, water utilities are wildly boring. However, taking the filtration angle could be a long-term winner. Pall and Xylem are two to watch for a pull back, while Lockheed Martin is an outsider that could find itself a big player in the filtration niche because of its military research.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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