Best stock to invest in – Water Quality Stocks | Alternative Energy Stocks



Best stock to invest in

by Debra Fiakas CFA

Pipes, pumps and values are only part of the drinking water story we
began telling last
week. 
The Ecological
Society of America
estimates that the U.S. spends more than $2
billion annually on clean water projects in an attempt to prevent
pollution and clean contaminated water.  Water quality is a
diverse market, beginning with projects to promote natural
ecosystems which are the ultimate ‘water filter.’  The market
extends to water treatment facilities, filtration systems and
purification technologies among other solutions to ensure that our
drinking water is safe.

The market for water quality solutions is highly fragmented with
numerous small operators, often with some engineering or
technological expertise, addressing the peculiar water issues in
their immediate locale.  Few companies have gains national or
international scale, save for those large engineering firms that
have broad interests in a variety of civil engineering
projects.  Most of the players are private, leaving few options
for investors to take a ‘pure play’ position in water quality. 
Nonetheless, we found one private player that offers some
interesting water quality solutions.  Two more public companies
provide good plays on water.

Headquartered in Pennsylvania, Evoqua
Water Technologies
has built a network of 170 sales offices
and production facilities in eight countries. Evoqua sells a mix of
water and waste water treatment products such as activated carbon
and sludge thickener or disintegration products.   The
company also sells a broad selection of systems for biological
treatment of water, waste water handling, aeration and anaerobic
digestion, among other equipment and components.  Engineering
and project integration services to commission, maintain and
optimize water and waste water facilities.  Besides catering to
the municipal drinking water and waste water market, the company
also serves various industry verticals such as aquatics, food and
beverage, pharmaceuticals and chemicals processing, among
others. 

Recently, Evoqua won contracts to build four wastewater treatment
plants that will expand the capacity of three different communities
and one private agricultural company.  The company’s
Davco-branded field-erected treatment solution will be installed in
each site for expansion of existing facilities.

Unfortunately, there is no public data available on the company’s
financial performance or market share.  That said we believe it
is highly likely that the company is profitable and has been
successful enough to generate strong cash flows that have funded the
company’s expansion beyond its home market in the U.S.  With
its brand presence on several continents, we expect Evoqua to
eventually end up on someone’s radar, either for a move to the
public capital market or as an acquisition target.


Xylem, Inc. (XYL:  NYSE)
does provide a publicly traded stock for investors interested in the
water market.  In the most recently reported twelve months
ending December 2015, Xylem reported $3.65 billion in revenue from
the sales of water infrastructure and equipment, providing $340
million in net income.  That represents a net profit margin of
9.3%.  The conversion of 12.7% of sales to operating cash flow
is even more impressive.

The company got its start with an innovative submersible wastewater
pump, parlaying that leading edge technology into a broad range of
water and waste water systems and components.  Among the menu
of products Xylem sells, is a selection of treatment systems and
analytical instruments that address water contamination
issues.  Xylem provides filtration, biological treatment and
desalination solutions.  The company has systems or products in
use in over 150 different countries.

Xylem is no small-cap.  It has earned a market capitalization
of $7.4 billion or 2.0 times sales.  That may seem pricey, but
we note that the stock is trading at 18.8 times projected earnings
of $2.00 in earnings per share in 2016.  A forward dividend
yield of 1.7% helps sweeten the pot.  Forward price multiples
in the water and waste water industry also suggest Xylem is priced a
bit dear.  The sector is commanding valuations only 11.8 times
2016 earnings estimates.

A significant competitor for Xylem is Danaher Corporaton (DHR: 
NYSE)
, which is an even bigger company with products and
services well beyond the water market.  Danaher describes its
business as a science and technology operation.  In a few words
its product line falls under test instruments, environmental
products and services and life sciences products.  Danaher can
measure the quality of the water at your tap so you can brush your
teeth with confidence.  They can also provide products to fix
your teeth.  That wide array of products earned Danaher $20.6
billion in revenue in the year 2015.

Danaher is on the calendar to report financial results for the March
2016 quarter on April 21st.  Analysts are expecting Danaher to
report a buck in net earnings per share.  Given that the
company has met or exceeded the consensus estimate in each of the
last four quarters, that $1.00 EPS figure seems like a safe
bet.  

Likewise Danaher is trading at a healthy 17.9 times the full year
2016 EPS estimate of $4.88 per share.  A forward dividend yield
of 0.7% helps make the case for DHR.

Debra Fiakas is the Managing
Director of
Crystal Equity
Research
, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

– Best stock to invest in

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