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Water,
For Thirsty Investors |
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 Though
completely unintentional, the Macro Trends/Micro Caps series of articles
seems to keep coming back to 'green friendly' themes. On May 20th we examined
a few small companies with a good shot at making clean coal technology
commonplace, and today we'll be exploring the investment opportunities
in clean water technology.
At the risk
of sounding alarmist, there is really only one root problem at hand in
the world of water....the supply of clean water is shrinking (though for
multiple reasons). The power of the underlying opportunity, however, may
be in the marketplace's non-recognition of this dynamic. As is so often
the case though, the investment opportunity may not become obvious to most
people until well after solutions have had to be implemented.
We believe the
'problem solvers' will also enjoy the spoils of being able to think ahead.
In other words, the companies with ready-to-go solutions to the key water-shortage
challenges could see unprecedented demand for their services. As you might
have guessed, some of the most compelling corporations in this small space
are small companies, if not micro caps.
Most investors
may be surprised (if not completely shocked) that the entire water industry,
on a global basis, is estimated to be a $400 billion market each year.
In the Unites States, the EPA estimates water expenditures are behind only
defense spending and Social Security. Of course, this total includes much
more than just a utility company pushing water through your pipes and into
your sink. The 'industry' also includes equipment, retail, repairs, pollution
control, infrastructure, and other facets. But still, $400 billion is a
lot of bucks up for grabs.
Yet, if forecasts
are accurate, the number may be increasing enormously over the next decade.
The EPA believes 25% of the United States' water pipes are in a poor or
elapsed condition. By 2020, the proportion could increase to 45%. According
to the American Society of Civil Engineers, the United States water infrastructure
will need $1 trillion worth of repairs within 20 years.
Population growth
has forced some geopolitical communities to improve their current infrastructure
as well. China is home to more than 20% of the world's total population,
yet they have access to only 7% of the planet's fresh water. How much will
a solution cost? China plans to spend $125 billion on water treatment and
recycling over the next five years. India's need is comparable to China's,
and there are dozens of other less visible geopolitical markets right behind
those two.
Though plentiful
and varied, most of the challenges highlighted by this growing water shortage
fall into one of three basic categories: infrastructure, purification,
or desalination. We'll look at each in a little more detail, and discuss
a handful of the companies within each category we think may be worth closer
inspection.
Like we mentioned,
the EPA estimates the United States' water systems need billions of dollars
in upgrades or repairs. China's need is even greater. In fact, the problem
may be completely global. Canada - one of the most water-rich nations in
the world - still needs to spend tens of billions of dollars to update
or refurbish its infrastructure.
Even for the
local water utilities that can afford it, most are not equipped to actually
do this kind of upgrade work themselves. They're going to be forced to
outsource the job to companies specializing in large-scale utilities improvements.
And where a utility infrastructure doesn't exist or isn't feasible, alternative
water supply initiatives still need to be taken.
 Mueller
Water Products Inc. (NYSE: MWA)
manufactures water infrastructure and flow control products for use in
water distribution networks, water, and wastewater treatment facilities.
Mueller just unveiled a security measure that will prevent deliberate water
contamination through relatively-vulnerable fire hydrants.
Tetra Tech (NASDAQ:
TTEK) operates two divisions that may benefit from the growing infrastructure
need. The Resource Management segment provides engineering and consulting
services, primarily to improve water quality and availability. The Infrastructure
segment offers engineering and construction management services in the
development, upgrade, and replacement of existing civil and security infrastructure.
Are they among the best? Well, they just struck a $63 million deal with
the EPA.
Layne Christensen
Co (NASDAQ: LAYN) provides
drilling and construction services and related products for ground water
systems and potable water treatment facilities. During their last quarter,
revenue was up 29% while income was up 76%. Both were records.
 Though
the gadget you attach to your kitchen faucet to filter out some of the
chemical and debris in your tap water is technically a purifier, we're
looking for companies that can clean water on a more macro level.
The World Health
Organization estimates unclean water is the reason for 80% of worldwide
sickness and disease. Some estimates say half of China's population drinks
contaminated water, and less than 15% of their population has safe tap
water. And the risk isn't isolated in China....as of last year, 95% of
the world’s cities still dump raw sewage into rivers and other freshwater
supplies.
With the global
population starting to outgrow the available supply of potable water, reusing
whatever water we can by purifying it may become a necessity. However,
some companies have developed feasible ways of doing it.
AquaCell Technologies
Inc. (AQUA.PK), through
its subsidiary Aquacell Water, Inc., manufactures water filtration and
purification products for various water treatment applications for municipal,
industrial, commercial, and institutional purposes. Its products can be
used in the removal of contaminants from municipal drinking water systems.
 Basin
Water, Inc. (NASDAQ: BWTR)
builds groundwater treatment systems, primarily in the United States. Its
proprietary ion-exchange wellhead treatment system reduces a wide variety
of groundwater contaminants. They recently started removing groundwater
nitrates for the city of Avondale, Arizona.
Megola Inc.
(MGOA.PK) provides physical
water treatment, microbiological control, and wastewater treatment.
Global Water
Technologies, Inc. (GWTR.PK)
offers water purification and services, and has a focus on municipal markets.
You're more likely to hear about their subsidiary Electric H2O (or EH2O).
EH2O recently sold filtration equipment to customers in India, Canada,
and Hong Kong.
It's not a sheer
lack of water driving the need, but a lack of accessible water fit for
human consumption. More than 3/4 of the world's water is undrinkable salt
water - more than enough to supply the world, if it were potable. Exacerbating
the problem is the slow rise in coastal sea levels, which contaminates
freshwater sources.
 Removing
the salt from seawater is not a new idea, or impossible. The challenge
has been in being able to do it an a massive scale, yet still do it economically.
However, the market still seems to be plenty big enough....just in the
Middle East, an estimated $117 billion is expected to be spent on desalination
technology by 2015.
Ultra Pure Water
Technologies Inc. (UPWT.PK)
is engaged in the manufacture, sale, and rental of pure quality water purification
equipment utilizing reverse osmosis filtration processes and water vending
equipment. Some of this his technology can desalinize water for municipal
systems with capacities exceeding 200,000 gallons per day utilizing desalination
and reverse osmosis processing equipment.
Water Chef Inc.
(OTCBB: WTER) engages
in the design and marketing of water dispensers and purification equipment
in the United States, European Union, Latin America, and China. It develops,
manufactures, and markets PureSafe line of water purification systems to
handle various applications, including pathogenic contamination, arsenic
contamination, brackish water treatment, or ocean desalination .
Though the growing
need is not yet headline news, it doesn't mean it won't be eventually.
However, sometimes the best time to start doing your homework - and groundwork
- as an investor is in the very early stages of a paradigm shift. Computers,
the Internet, nuclear energy, immunology, solar power, and dozens of other
industries all started as out as mere curiosities before becoming an obvious
investment opportunity.
Furthermore,
for every one company we mentioned above, there are probably ten more comparable
companies. Certainly not all of them will bear fruit for investors (some
are not even profitable yet), but the ones that do may bear quite a bit
of it. So, as always, your own due diligence is merited. We believe the
companies that emerge as leaders in the field of water desalination, purification,
and infrastructure providers could be a powerful and diverse addition to
long-term portfolios .
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Updated: 9:18 am PST (17:18 GMT), January 5, 2009
