Many of us will read this and be oblivious to the worldwide crisis. But if the current trends continue, it will become real to all of us soon enough. Most of us learned in elementary school that 97% of the world's water is salt water. And only about 1% of the total water supply is drinkable.
That is becoming difficult math for several areas of the world. A severe, multi-year drought is causing water levels to sink to historically low levels. And the federal government is threatening to cut water use by 25% in the most-affected states of Arizona, California, and Nevada.
And even if we're not put under water restrictions, we are all likely to see higher costs for food. One reason for that is that about 25% of the nation's food supply comes from California. An American Farm Bureau Federation survey conducted in 2021 found that 40% of farmers sold off part of their cattle herds.
But opportunities present themselves in the midst of crisis, and this is no difference. In this special presentation, we're looking at seven water stocks that look like smart buys as the world grapples for solutions.
Quick Links
- American Water Works
- Essential Utilities
- American States Water Company
- Danaher
- Pentair
- Mueller Industries
- Xylem
#1 - American Water Works (NYSE:AWK)
Heading up this list of water stocks is one of the leading water utilities in the country. American Water Works (NYSE:AWK) has met or beaten earnings per share (EPS) expectations in each of the last 20 quarters. And while the same can’t be said of revenue, the company benefits from the simple fact that individuals have to pay their water bill.
From a balance sheet standpoint, American Water Works has a profit margin of 3.99% which is nearly double the sector average. And the recent sell-off in AWK stock has the company at a price-to-earnings (P/E) ratio of 21x earnings which should be easily supported by the company’s revenue expectations over the next five years.
Utility companies are a favorite of dividend investors. The company’s 1.72% dividend yield won’t get many people excited. However, it’s payout of $2.62 on an annual basis is considerably higher than the sector average of $1.81. And the company has increased its dividend in each of the last 14 years.
About American Water Works
American Water Works Company, Inc, through its subsidiaries, provides water and wastewater services in the United States. It offers water and wastewater services to approximately 1,700 communities in 14 states serving approximately 3.5 million active customers. The company serves residential customers; commercial customers, including food and beverage providers, commercial property developers and proprietors, and energy suppliers; fire service and private fire customers; industrial customers, such as large-scale manufacturers, mining, and production operations; public authorities comprising government buildings and other public sector facilities, such as schools and universities; and other utilities and community water and wastewater systems.
Read More - Current Price
- $137.89
- Consensus Rating
- Reduce
- Ratings Breakdown
- 2 Buy Ratings, 3 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $142.29 (3.2% Upside)
#2 - Essential Utilities (NYSE:WTRG)
Unlike American Water Works, Essential Utilities (NYSE:WTRG) is not a pure play water stock. That’s because Essential Utilities is the parent company of Aqua America and Peoples Natural Gas which does business under that name. The natural gas market is more volatile than the water market and that’s reflected in the WTRG stock price which has never fully returned to its pre-pandemic level.
Putting that aside, the company does business in eight states and maintains a strong balance sheet. The company is trading at just under 30x earnings which is a value compared to the broader sector. Essential Utilities is also a dividend aristocrat having increased its dividend in each of the last 32 years. And the company’s current 2.29% dividend yield is supported by a projected growth of about 7% in earnings over the next five years.
About Essential Utilities
Essential Utilities, Inc, through its subsidiaries, operates regulated utilities that provide water, wastewater, or natural gas services in the United States. The company operates through Regulated Water and Regulated Natural Gas segments. It offers water services through operating and maintenance contract with municipal authorities and other parties.
Read More - Current Price
- $38.94
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 4 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $44.00 (13.0% Upside)
#3 - American States Water Company (NYSE:AWR)
The last utility company on this list is American States Water Company (NYSE:AWR). Like Essential Utilities, American States Water is not a pure play water stock. The company also buys and distributes electricity through its network of nine states.
Like many utilities, location matters. And American States Water is one of the largest water utility companies in California. The company serves approximately 260,000 customers in 80 California communities. That’s about a quarter of its customer base.
Over the last five years, AWR stock is up 73%. And since the June trough for the broader market, the stock is up 17%. That’s in addition to the company being a dividend king which means it’s increased its dividend for at least 50 consecutive years. In the case of American States Water, the company has increased its dividend for the last 62 consecutive years.
About American States Water
American States Water Company, through its subsidiaries, provides water and electric services to residential, commercial, industrial, and other customers in the United States. It operates through three segments: Water, Electric, and Contracted Services. The company purchases, produces, distributes, and sells water, as well as distributes electricity.
Read More - Current Price
- $84.36
- Consensus Rating
- Hold
- Ratings Breakdown
- 0 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $87.00 (3.1% Upside)
#4 - Danaher (NYSE:DHR)
The next company on this list is also not a pure play water company. Danaher (NYSE:DHR) is a diverse industrial conglomerate. However, one of the company’s revenue drivers comes from providing water testing equipment.
This helps solve the problem of the nearly 33% of the global population that lacks access to clean drinking water. It also gives the company a large addressable market. And by some accounts, that segment accounts for nearly 10% of the company’s revenue which continues to climb on both a sequential and annual basis. For the next five years, the company’s revenue and earnings are both expected to climb at around 5%. But if water is the driver that it’s expected to be the company’s revenue may approach its historical 12% annual revenue gains.
DHR stock is down approximately 15% this year which puts it in line with the S&P 500. However, Danaher maintains a Moderate Buy rating from the analysts tracked by MarketBeat. Those same analysts give DHR stock a price target of $324 which is about a 16% upside from current levels.
About Danaher
Danaher Corporation designs, manufactures, and markets professional, medical, industrial, and commercial products and services worldwide. The Biotechnology segments offers bioprocess technologies, consumables, and services that advance, accelerate, and integrate the development and manufacture of therapeutics; cell line and cell culture media development services; cell culture media, process liquids and buffers for manufacturing, chromatography resins, filtration technologies, aseptic fill finish; single-use hardware and consumables and services, such as the design and installation of full manufacturing suites; lab filtration, separation, and purification; lab-scale protein purification and analytical tools; reagents, membranes, and services; and healthcare filtration solutions.
Read More - Current Price
- $233.10
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $287.16 (23.2% Upside)
#5 - Pentair (NYSE:PNR)
Pentair (NYSE:PNR) is attempting to address two of the current issues with our global water supply. First is the need for home filtration. The company recently introduced the Pentair Rocean Reservoir which is a countertop water filtration system.
Not only will this system help provide cleaner water from the tap; it also helps reduce the need for plastic water bottles. This is potentially a huge driver as companies are trying to discourage plastic bottle usage as part of a more sustainable approach.
Pentair sports one of the best profit margins in its sector and is trading for around 13x earnings. That being said, PNR stock is down about 37% in 2022. However, if the stock has put in a bottom around its 52-week low investors may be rewarded with a stock that analysts tracked by MarketBeat give a price target of $64.91, a 42% upside.
About Pentair
Pentair plc provides various water solutions in the United States, Western Europe, China, Eastern Europe, Latin America, the Middle East, Southeast Asia, Australia, Canada, and Japan. The company operates through three segments: Flow, Water Solutions, and Pool. The Flow segment designs, manufactures, and sells fluid treatment and pump products and systems, including pressure vessels, gas recovery solutions, membrane bioreactors, wastewater reuse systems and advanced membrane filtration, separation systems, water disposal pumps, water supply pumps, fluid transfer pumps, turbine pumps, solid handling pumps, and agricultural spray nozzles for fluid delivery, ion exchange, desalination, food and beverage, separation technologies in the oil and gas industry, residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, circulation and transfer, fire suppression, flood control, agricultural irrigation, and crop spray in residential, commercial, and industrial markets.
Read More - Current Price
- $104.17
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 10 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $105.13 (0.9% Upside)
#6 - Mueller Industries (NYSE:MLI)
A more “boring” way to invest in water stocks is with a picks-and-shovel company like Mueller Industries (NYSE:MLI). However, as Mueller proves, boring can be beautiful. The company manufactures the pipes, valves, and fittings that are essential to commercial and residential water systems. It also sells fire hydrants.
The company’s revenue and earnings have been growing strongly in the past year. And that is reflected in the company’s stock price which is up 44% in the past year, including about a 10% growth in 2022.
Despite this growth, MLI stock still sports an attractive valuation of just over 5x earnings. And the company is forecasting double digit earnings and revenue growth over the next five years.
About Mueller Industries
Mueller Industries, Inc manufactures and sells copper, brass, aluminum, and plastic products in the United States, the United Kingdom, Canada, South Korea, the Middle East, China, and Mexico. It operates through three segments: Piping Systems, Industrial Metals, and Climate. The Piping Systems segment offers copper tubes, fittings, line sets, and pipe nipples.
Read More - Current Price
- $91.03
- Consensus Rating
- Hold
- Ratings Breakdown
- 0 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#7 - Xylem (NYSE:XYL)
The last stock on this list is by a company that’s attempting to use technology to address the emerging water scarcity concerns. According to Xylem (NYSE:XYL) by the year 2025, “1.8 billion people will be living in countries or regions with absolute water scarcity.”
That adds urgency to the company’s mission of developing technology applications to the water and wastewater management industries. The company ”offers hundreds of solutions backed by a comprehensive, integrated portfolio of services designed to ensure that water and wastewater treatment equipment keeps running at its best.”
One of the key problems that Xylem can help to solve is the issue of a leaky pipe. This is particularly important with an aging infrastructure. The average water main in the United States hasn’t been replaced since the 1970s.
That being said, XYL stock is down 22% for the year and the consensus price target of analysts surveyed by MarketBeat give the stock about 9% upside. Still with the company projected to post double digit revenue growth in the next five years, Xylem may be a good long-term play for patient investors.
About Xylem
Xylem Inc, together with its subsidiaries, engages in the design, manufacture, and servicing of engineered products and solutions worldwide. It operates through four segments: Water Infrastructure, Applied Water, Measurement & Control Solutions, and Integrated Solutions and Services. The Water Infrastructure segment offers products, including water, storm water, and wastewater pumps; controls and systems; filtration, disinfection, and biological treatment equipment; and mobile dewatering equipment and rental services under the ADI, Flygt, Godwin, Sanitaire, Magneto, Neptune Benson, Ionpure, Leopold, Wedeco, and Xylem Vue brands.
Read More - Current Price
- $122.84
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 8 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $149.64 (21.8% Upside)
In addition to weather-related factors, water stocks will continue to offer a potentially enticing play due to other trends such as the focus on ESG (environmental, social, and corporate governance) issues. Yet even with the essential role that water plays in our lives, many investors would be surprised to learn that water is a much smaller market than oil.
Deane Dray, of RBC Capital Markets estimates the global water business to be approximately $655 billion a year. Crude oil, by comparison, is about $3 trillion. It's also easier to transport crude oil than to transport water. Both of these facts create compelling trading opportunities for investors in water stocks.
And like many other sectors, quality matters. Investors should be careful to look for the water stocks with the best opportunities for growth. However, that doesn't mean that investors should forget about utility companies. In fact, at times like these defensive sectors like utilities shine the brightest.
The stocks in this presentation show why it's the businesses that make the best use of technology that have a real opportunity to shine during this crisis.
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