Volume 43 Number 6
Drinking Water Dollars: The Water Industry -- Dawn of Phase Two
The past two years have been difficult for an investor focused on the water industry. Not because the investment performance was necessarily poor, but because it was difficult to get investors interested in anything except "tech" stocks. Pointing out that tech doesn't exist without water was a useless argument, but I tried. On Nov. 15, 1999, I wrote a report recommending a water treatment equipment company where I said:
"It's ironic that as Wall Street is consumed with the impact technology and the Internet are having, and will have on our lives in the future, projections analysts use to justify their recommendations take into consideration the impact of change anticipated over several years. We agree, the Internet is truly changing our lives. However, we believe the probability there will be a water crisis is of greater consequence to humanity, and yet we're paying scant attention to it. At least 300 million people live in regions of severe water shortages. By the year 2025, it will be three billion! The irony is that today we have available to us the solutions to these water problems. What has been lacking is the will to solve them. In our opinion, as the problem grows larger, and the cost of water continues to rise, investors will realize water investments offer the prospect of enormous growth."
Much has changed since Nov. 15, 1999. Fast forward to the end of the first quarter of 2001 and note that we've just experienced the worst decline in Nasdaq history, off 25 percent in the January-March period, and down 65 percent from its peak a year ago. The Dow Jones Industrial Average was down a much less jarring 8.42 percent in the first quarter and 10 percent for the year. Happily, I report that in the same period of time, water industry securities have enjoyed considerable success. Prices of a large number of stocks I follow have increased substantially in the first quarter. For example, Calgon Carbon Corp. was up 31.52 percent, and Consolidated Water Co. was up 35.71 percent. Glacier Water Trust Preferred was up 32.61 percent, Isco Inc. was up 23.21 percent, Met-Pro Corp. was up 27.86 percent and, finally, Watts Industries Inc. was up 20.36 percent. Our model portfolio of 20 stocks was up slightly more than 7 percent for the quarter.
From oil to water
The water industry has undergone significant changes over the past 15 years. In my opinion, the first phase of the evolution of the water industry began approximately in 1987 and continued on through the early part of 2000. During that 13-year period we saw the Phoenix-like rise of USFilter from virtually zero to several billion dollars in revenues, and its subsequent acquisition by Vivendi. An enormous number of mergers and acquisitions were the hallmark of this period.
Entering a new age
Consider the scope of the companies that are players today. In addition to the obvious giants Vivendi and Suez Lyonnaise des Eaux, some of the mammoth companies that are major participants in water include GE, Dow Chemical, DuPont and Bayer, among others. Peculiarly, these companies are rarely mentioned as participants in the water industry. Perhaps this is because the amount of business they do in water is small in relation to their overall size; however, in all cases, the size of their water industry business is huge when compared to today's pure play water companies. Furthermore, and more telling about changes under way in the industry, these behemoths are expanding their water business. For example, Bayer recently bought Sybron Chemicals and GE recently bought Glegg, a manufacturer of high-purity water equipment serving the power industry. GE is also expanding its activities in drinking water through its appliance division. For a moment, consider the weight of the word "appliance." It appears GE is saying that water treatment systems will be in all homes, just as there is a refrigerator or a garbage disposal.
A 'watershed event'
Much attention is focused today on the power crisis gripping the nation. Little attention, however, is being given to how this crisis relates to the water industry. Perhaps too few realize the biggest user of ultrapure water is the power generation industry. No wonder GE, a major player in power, is also expanding in the high-purity segment of the water industry. It would appear GE's recent purchase of Canada-based Glegg wasn't a fluke after all. Even though this acquisition occurred well in advance of front-page news of power shortages, GE appears to have anticipated these developments. GE is only one of a great many large companies focused on both water and power. Other companies that generate considerable revenues in this area include, but aren't limited to, Ionics Inc., Osmonics Inc. and many others.
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