2 Stocks Fighting A Future Without Water

Joseph Hogue's picture

Thursday, May 21, 2015 - 12:30am

by Joseph Hogue

Scientists and environmentalists have been talking about climate change for more than a decade, but the topic has thus far had minimal impact on our daily lives.  

That is until the last few years, as an historic drought has spread across most of California. More than two-thirds of the state is in "extreme" drought conditions as it enters its fourth year of low rainfall. Regulators have recently instituted the first-ever mandatory cuts to water usage for residential and commercial customers.

The problem may not be California's alone. Elsewhere in the United States, and around the globe, water crises have begun to emerge with increasing frequency.

Might we all be subject to wide-scale water rationing one day? Even if we don't experience the nightmare desert scenes portrayed in so many post-apocalyptic movies, we will surely need more efficient monitoring and treatment of our water resources in the future.

Depleting water resources could mean huge sales for two companies in particular.

Is California The Future For Everyone?

California's historic drought has led to the state's first ever mandatory water conservation law. One of the state's 10 largest reservoirs, the New Melones, may be dry by this fall and nine reservoirs are at 20% capacity or lower. The U.S. Drought Monitor has placed most of the state in "extreme" drought and 40% in "exceptional" drought conditions, the most severe category.

Over the nine months to February 2016, cities and districts with more than 3,000 water connections will be required to reduce consumption by 8%-to-36% with a state-wide savings goal of 25%. 

The drought is showing no signs of abating and California isn't alone in its fight against extreme weather. The first three months of 2015 were the hottest globally of any year on record and 13 of the 14 hottest years of the past 100 were in the 21st century.

While three-quarters of the Earth's surface is covered with water, less than one percent (0.37%) is potable. Groundwater, where we get drinking water, is even scarcer at just 0.28% of the Earth's water resources.

The Food and Agriculture Organization reports that agriculture accounts for 70% of our global water needs. This means that as global population growth leads to increases in food consumption, water resources could get stretched thin.

Nearly a billion people around the globe already lack sources for safe drinking water and water treatment and reuse may be the only solution for the future.

The Future Of Water Is Monitoring And Technology

The historic drought in California will mean the need for additional water monitoring and may be just a sign of the resource's future.

More than 235,000 residences and businesses in California are not equipped with water meters, despite a state law that requires complete metering by 2025. If the state (and eventually the world) wants to conserve resources and prevent wasting, it will need to step up monitoring.

That could mean a surge in business for Mueller Water Products, Inc. (NYSE: MWA), a company that supplies products for the distribution and measurement of water resources. The company's advanced metering infrastructure applications are part of an intelligent system strategy that the company is promoting to drive efficiency in public water use.

Mueller Water touches nearly every step of public water use from industrial valves at the treatment plants to valves in the distribution network, metering systems at connections and leak detection systems.

Mueller books all of its revenue in North America, but may expand internationally as part of its growth strategy. Earnings are expected to rise 40% in 2015 to $0.42 per share, for a forward price-to-earnings ratio of 22.6.

Ongoing water shortages could also benefit Xylem, Inc (NYSE: XYL), a pure-play water company providing engineered technology products for pumping, testing and treatment. As end users look to reuse water resources, they could increasingly look to Xylem and its treatment technology.

The company books 44% of its total sales in the United States, followed by Europe (35%) and emerging markets (21%). Nearly half (40%) of the company's revenue is from recurring customers from a growing network of clients.

Earnings are expected to drop 5% this year to $1.86 per share (due to currency impacts) before heading 13% higher next year. Shares trade for 19.9 times expected 2015 earnings and pay a 1.5% dividend yield.

Risks To Consider: Even in the face of the historic depth of the California drought, the water investment angle is a long-term theme and may not result in immediate returns for investors.

Action To Take --> Take advantage of the developing trend to water scarcity with two of the strongest names in monitoring and resource technology.

Oftentimes the little ideas are the big game changers -- something like water meters. My colleague Andy Obermueller devotes his time to identifying game-changing trends and the companies that should benefit from this. This has led readers to investments that went on to gain triple-digits. More recently, Andy has been talking about the profit potential for Apple's newest technology Apple Pay -- and more importantly the company's key suppliers. If you haven't heard about this opportunity yet, then I urge you to check out his comprehensive report on how to profit from this technology, by clicking here.

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.