Making a List …

Making a List …

Opportunities in Water Infrastructure

Three Value Stocks with Growth Potential

Until this market shows signs that the recent declines are wrapping up, many of our advisors at the Investment Digest and the Dividend Digest—and I, too—think it’s a great time to keep some cash on the sidelines.

But that doesn’t mean we can give our investing brains a day off. Instead, this is a fine time to think about the sectors that hold great potential once the bull returns. Traditionally, early bull markets favor financials, technology and transportation. But we were long past that point in the market cycle when the bull decided to take a rest.

My best guesstimate is that when we return to a rising marketplace, we’ll still be somewhere around a mid-to-late bull stage, when sectors like capital goods and basic industry will be the standouts. Coincidentally, at that same time, if the economy continues to chug along, we should be entering the mid-recovery economic stage, which, historically, also bodes well for capital goods and basic industries.

And one of the basic industries that has recently caught my interest is infrastructure, particularly water infrastructure in the U.S.

According to the Water Main Break Clock, www.watermainbreakclock.com, every single day, North America sees 850 water main breaks, costing more than $3 billion a year to repair. Corrosion is the biggest problem, adding up to an annual bill of $50.7 billion, or more than $1 trillion in the next two decades.

The crux of the problem is that the majority of our buried water infrastructure (more than a million miles of pipe) was constructed more than 50 years ago, with some pipes dating back even longer, all the way to the 1800s. And we have been shoving the need to repair or replace those pipes under the rug for years. Now, it’s time to pay up.

According to the U.S. Environmental Protection Agency, in the next 20 years, it will cost us $384 billion just to maintain our existing drinking water systems. That’s bad enough, but we all know the government isn’t very good at estimates, so it should come as no surprise that the water industry thinks that number is a lot higher.

In fact, the American Water Works Association says that it will take $1 trillion to replace all the outdated pipes in the U.S., as well as account for growth over the next 25 years.

The challenge is finding the money, of course. Americans don’t pay much for access to clean water to begin with, and we’ve become much better at water conservation, decreasing demand—both of which keep pressure on water utility revenues. We’ll have to see those rates rise in order to update our systems.

But the bulk of the funding will have to come from government programs, like the new WIFIA (Water Infrastructure Finance and Innovation Act) loan program. It’s co-administered by the EPA (Environmental Protection Agency) and the Army Corps, and its intent is to provide secured loans and loan guarantees to both government and non-government entities for up to 49% of eligible project costs. The five-year credit subsidy, not the total amount of available financing, for WIFIA, is $350 million, starting this year with $40 million.

At the end of last year, USDA announced that it would provide more than $352 million in loans and grants to upgrade rural water and wastewater systems in the U.S. And many states are allocating millions of dollars in funds to upgrade their systems.

It’s going to take some time, that’s for sure. But, as funds become available, we’ll begin to see some pretty big contracts for the pipe manufacturers, construction and engineering design firms.

There will, no doubt, be many firms that will participate in the coming largesse. But these three look pretty interesting, and maybe worth your review to see if they may find a place in your portfolio.

Chicago Bridge & Iron (CBI)—the company provides design, engineering and fabrication for infrastructure needs worldwide. Eleven analysts currently rank the stock a “Buy,” and the company beat earnings estimates by $0.14 per share last quarter.

Mueller Water Products (MWA)—the company manufactures and markets products and services for use in the transmission, distribution and measurement of water in the United States, Canada and internationally. It’s growing at double-digit rates, and eight of its 12 analysts currently have “Buy” ratings on the stock.

Tetra Tech (TTEK)—the company provides consulting, engineering, program management, construction management and technical services for water, environment, energy, infrastructure and natural resources sectors. Five analysts currently rate the shares a “Buy,” and estimate that revenues will grow at almost a 50% rate in the current quarter.

These stocks are trading at discounted levels, have great growth potential, and might just be worthy of a look-see once the market starts a new cycle up. 

Sincerely,

Nancy Zambell,

Chief Analyst, Investment Digest and Dividend Digest

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