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In a game of word association many investors might respond Veolia Environmental SA (VIE:
P or VEOEY: OTC/PK) at the mention ‘water reclamation.’
General Electric (GE:
NYSE) and Siemens
(SIE: DE or SIEGY:
OTC/PK) might be next choices. These three companies have been
‘go to’ sources for water treatment by municipalities and industry.
Indeed, it may take a behemoth to address water issues. In
January 2015, the World Economic Forum declared water as the number
one crisis impacting the world, recognizing the dire circumstances
of water supplies. Over 660 million people – one
in ten people – around the world do not have access to
safe water for drinking, cooking and bathing. For some it is a
matter of inadequate water supplies and for others economics prevent
them from accessing quality water sources.
Some might be confused by this circumstance given the wide expanse
of world waterways. Unfortunately, 97.5% of the planet’s water
is saltwater and another 1.75% is trapped in ice. Only the
remaining 0.75% is available for drinking water, coming from a mix
of underground wells, rivers and lakes. The amount of water
supplies will not change, but we are expected to see an increase in
fresh water demand by as much as 40% by the year 2030 as developing
countries seek to improve quality of life for its citizens and new
industrial and commercial processes rely on water.
The inadequacy of good quality, affordable waters supplies renders
precious every water droplet, shedding light on why water treatment
is big business and not just business for a few big companies.
The best water is called ‘potable water’, which historically has
been provided through natural sources. Sometimes even Mother
Nature falls short of goal, leaving impurities in drinking water
supplies or nature is simply overwhelmed by man-made pollution and
misuse. The need to treat water has given rise to a large
market for separation, filtration and treatment solutions.
Pentair Plc. (PNR: NYSE)
is a growing player in the water treatment industry.
Unlike the big companies named in the opening paragraph of this
article, Pentair is exclusively focused on water. With
corporate headquarters in the United Kingdom, Pentair keeps its
primary business office in the U.S. Among a mix of other
water-related products, Pentair offers ultra-filtration and
nano-filtration solutions to purify liquids. Its products are
used by water system owners, industry and homeowners.
In the fiscal year ending December 31, 2015, Pentair reported $6.5
billion in total sales and a net loss of $65 million or $0.42 per
share. Excluding a non-recurring charge of $554 million
related to the write-off of intangible assets, operating income for
continuing operations was $2.63 per share. Operations
generated $739.3 million in cash flow in the year, leaving $126.3
million in the bank at the end of December 2015, after investments
and pay-down of debt. Pentair has relatively leveraged with a
debt-to-equity ratio of 117.49. Management seems to have no
trouble in juggling cash and debt, devoting some operating cash
flows to a regular dividend. Current yield is around 2.5%.
A true small-cap play on water treatment can be found in Calgon Carbon (CCC:
NYSE), a supplier of a broad mix of filtration and
purification solutions for fluid and gas streams. The
company is probably best known for its activated carbon materials,
which are widely used by water system owners to filter out
contaminants. Calgon also offers ultraviolet irradiation and
ion exchange technologies for waster systems. The company
recently opened a new plant in the U.K. for the reactivation of
spent carbon used in drinking water applications. Capacity at
the plant has been increased to 10,000 tons per year from 5,800,
providing some insight into the promise Calgon sees in the water
market for its carbon products.
Calgon also offers a dividend, but its yield of 1.4% is not as
appealing as that of Pentair. However, Calgon shares are
trading at an interesting 12.9 times forward earnings, making it a
relative bargain given the projected earnings growth of 19% in 2016.
Calgon reported $535 million in total sales for its water quality
solutions, providing $43.5 million in net income. That
represents a net income margin of 8.1%. The conversation
of sales to operating cash was an even more impressive 13.1%.
The company is a consistent generator operating cash flow, which is
probably why the company has a relatively low leverage
position. The debt-to-equity ratio is 28.3 for Calgon compared
to a 90.6 ratio for the greater pollution control and treatment
Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
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.
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