Evoqua is one of the few companies with ways of removing “forever” chemicals, or PFAS, from water.
Water is harder to pump than crude oil. It’s harder to invest in, too.
Water, believe it or not, is denser than crude oil, which makes transporting it a feat. In fact, while energy is a sector, water is an amalgamation of 17 subsectors, according to RBC Capital Markets analyst Deane Dray, including water treatment, valves, pumps, filtration, desalinization, and metering.
Water, for all of its importance to life, is also a much smaller business than oil. Dray, who has presented at United Nations water conferences, estimates the size of the global water business at about $655 billion a year, a fraction of the roughly $3 trillion worth of crude oil consumed around the globe each year.
Still, drought, climate change, population growth, and a focus on environment, social, and corporate governance investing make water a perpetually intriguing sector for investors. The trick, Dray explains, is to invest in water businesses with the best technology and not just interchangeable items.
“The world is awash in commodity water products: pipes, pumps, and valves,” Dray says. “The emphasis should be on smart water systems.”
But there’s room for water utilities, too, says Jay Rhame, portfolio manager for the
Virtus Reaves Utilities
exchange-traded fund (ticker: UTES), who points to their stability as a main selling point. Exhibit No. 1:
(YORW), a small utility in Pennsylvania that has paid dividends continuously since 1816. Its streak is believed to be the longest in U.S. history.
With a $620 million market capitalization, York might not be appropriate for every portfolio. The six stocks discussed on this page, however, deserve a closer look.
American Water Works
Investors like water utilities for their stability, and
American Water Works
(AWK) is as stable as they come. The company is expected to grow earnings at an 8% annual rate for the next three years, after increasing them by 8% a year over the past decade.
That consistency has earned American Water Works a price/earnings ratio of 32 times, in line with its three-year average. It’s not hard to see why. Everyone needs water, and just about everyone pays their water bill. What’s more, utilities are allowed to earn a return on fixing and replacing pipes. Rhame says that makes projecting their results relatively easy. The stock pays a dividend of 1.7%.
(DHR) isn’t a pure-play water company, but it is a technology provider with a strong market position, says Dray, who estimates that 10% of its sales are directly related to water. “I have been in water plants on five continents, and they all use Danaher water test systems,” he adds.
Danaher stock trades for about 26 times estimated 2023 earnings, a small discount to its average of 28 times over the past few years. The company is expected to boost earnings at an annual rate of about 7% for the coming three years, but that might be conservative. It has historically grown profits at an average annual rate around 12%.
(WTRG), based in Bryn Mawr, Pa., isn’t a pure play—it also delivers natural gas to customers—-and that makes it a little less stable than American Water Works. Its historical results are still impressive “It’s a really well run water utility,” says Rhame,
Essential Utilities earnings have grown at a 9% annual clip for the past decade, and should increase at just under 8% a year on average for the next three years. Essential Utilities’ stock trades for about 27 times next year’s expected earnings, in line with its recent history, though not as high as American Water, due to its gas business. The shares have about a 2.3% dividend yield.
Evoqua Water Technologies
(AQUA) cleans water for more than 38,000 customers in industries including electronics, manufacturing, and even water parks. The stock isn’t cheap. It trades for 37 times 2023 earnings, a premium to its three-year average of 35. But earnings are expected to grow by 15% a year over the next three years, up from 10% over the past few years.
Evoqua is also one of the few companies with ways of removing “forever” chemicals, or PFAS, from water, which could be a billion-dollar business if the federal government designates them as hazardous substances. Dray rates the shares Outperform and has a $44 target for the stock, up some 15% from recent levels.
Mueller Water Products
Mueller Water Products
(MWA) makes fire hydrants and has one of the largest installed bases of iron-gate valves, used to stop the flow of water in mains or garden hoses, in the U.S.
Mueller’s profits are cyclical and can rise and fall with the economy. The stock dropped 10% after the company missed fiscal third-quarter earnings in August, a development it blamed on inflation and supply-chain pressure. Seaport Global analyst Water Liptak believes that the decline is an opportunity.
Earnings are expected to advance at about 13% annually for the next couple of years. At 17.5 times 2023 earnings, Mueller trades at a small discount to its three-year P/E of 18.3 times.
Leaky pipes are a big problem. The average age of a water main in the U.S. is roughly 45 years. And Rye Brook, N.Y.–based
(XYL) is here to solve it. If a utility has a leaky water main, Xylem can detect and diagnose the problem remotely. About 35% of the company’s sales come from digital products, and that should get closer to 50% by mid-decade, says Alec Lucas, an analyst at ETF provider Global X.
Xylem stock trades for about 30 times estimated 2023 earnings, well above the
17. But earnings are expected to grow at an annual rate of 25% for the next three years. The digital products, which have better profit margins, help boost earnings growth, says Lucas.
Write to Al Root at email@example.com