10 Stocks That Won't Leave You High and Dry

BOSTON (TheStreet) -- Most of us don't give our water supply much thought. But "free," or at least endless, supplies of relatively cheap water are evaporating, and the enormity of the problem is growing because of rapid climate change and the threat of global warming.

So water price shocks for companies and consumers aren't far off. That will prompt new ways of managing the resource, which is why the long-term prospects for water-industry companies' stocks, ranging from utilities to manufacturers of pipes, chemicals and computerized controllers are so compelling.

"Much of the U.S. water infrastructure dates back to the Great Depression, and the Environmental Protection Agency estimated in 2007 that it would require about $335 billion to upgrade and repair just community and not-for-profit water systems," writes a Morningstar analyst. "With municipalities struggling to finance basic repairs and federal funding unable to bridge the gap, the signs point to massive opportunities for investor-owned businesses."

Not to mention the international demand for modern drinking- and waste-water infrastructure design, construction and maintenance.

The S&P Global Water Index, made up of 50 stocks, has risen 9.8% this year, versus the S&P 500's 9.4% gain. The water index is up 67% over the past three years, more than three times that of the S&P 500.

Indicative of the size of the need for spending, industry trade group the American Water Works Association estimated in a recent research report that fixing and expanding underground drinking water systems in the U.S. will cost over $1 trillion in the next 25 years.

In the near term, it's expected that big infrastructure spending will be fitful as already cash-strapped local governments face opposition to tax increases. But S&P says it expects water utilities will get "adequate rate hikes to cover rising infrastructure costs for aging water systems."

Inevitably, though, an increasing number of communities will choose to sell their municipal water supply utility to private, professional managers or establish public-private operating partnerships.

That creates opportunities for companies such as American Water Works(AWK), already the nation's largest private water utility, and water-management specialists such as Xylem(XYL), which has products that cover the gamut of water industry needs, from transportation to purification.

Here are 10 stocks representative of various aspects of the water industry that are expected to benefit from the changes ahead, arranged in inverse order of market capitalization:

10. Mueller Water Industries(MWA)

Company profile: Mueller, with a market value of $556 million, designs, manufactures, and distributes water infrastructure components such as flow control, and piping component systems for use in drinking and wastewater markets.

Dividend Yield: 2.02%

Investor takeaway: Its shares are up 43% this year but have a three-year, average annual loss of 0.63%. Analysts give its shares two "buy" ratings, six "holds," and one "weak hold," according to a survey of analysts by S&P.

Analysts estimate that it will lose 3 cents per share this year, but turn it around to earn 14 cents per share in 2013.

9. Calgon Carbon(CCC)

Company profile: Calgon, with a market value of $796 million, provides products and services for purifying water used in the manufacture of food, chemicals, and pharmaceuticals, as well as in water treatment, air and water purification, and environmental cleanup.

Investor takeaway: Its shares are down 11% this year and over a three-year period have an average annual decline of 8%. Analysts give its shares five "buy" ratings, and three "holds," according to a survey of analysts by S&P.

8. Watts Water Technologies(WTS)

Company profile: Watts Water, with a market value of $1.5 billion, makes plumbing products including pressure regulators, relief valves, fittings, drains, filtration systems, and pumps.

Dividend Yield: 1.15%

Investor takeaway: Its shares are up 12% this year and have a three-year, average annual return of 23%. Analysts give its shares four "buy" ratings, nine "holds," and one "weak hold," according to a survey of analysts by S&P. S&P has it rated "sell" based on "still-challenging global markets, especially in construction, along with our valuation metrics."

7. Itron(ITRI)

Company profile: Itron, with a market value of $1.7 billion, supplies automated meter reader systems to electric, gas, and water utilities worldwide.

Investor takeaway: Its shares are up 22% this year, but have a three-year, average annual decline of 2%. Analysts give its shares eight "buy" ratings, five "buy/holds," 11 holds," and one "sell," according to a survey of analysts by S&P. S&P has a "hold" rating, principally on valuation concerns. Analysts expect it will earn $3.97 per share this year, and that will grow 3% to $4.09 next year.

6. Valmont Industries(VMI)

Company profile: Valmont, with a market value of $3 billion, manufactures irrigation systems that conserve water and improve food production, as well as pole systems and structural steel tubing, for use in street light poles, traffic signals, high-voltage transmission structures, and communication towers.

Dividend Yield: 0.5%

Investor takeaway: Its shares are up 35% this year and have a three-year, average annual return of 26%. Analysts give its shares four "buy" ratings, two "buy/holds," and three "holds," according to a survey of analysts by S&P. Analysts estimate it will earn $7.53 per share this year and grow 12% to $8.41 per share in 2013.

5. Pentair(PNR)

Company profile: Pentair, with a market value of $4 billion, makes pumps mostly for commercial and residential applications, including sump pumps, well pumps, and fire-protection pumps as well as replaceable filters and enclosures for electronic systems. At the end of March, it announced a $10 billion merger with Tyco International's Tyco Flow unit.

Dividend Yield: 2%

Investor takeaway: Its shares are up 33% this year and have a three-year, average annual return of 23%. Analysts give its shares six "buy" ratings, one "buy/holds," and 10 "holds," according to a survey of analysts by S&P.

S&P has it rated "buy," with a $55 price target, which is a 23% premium to its current price. It says that recent acquisitions will bolster its water filtration footprint and "we expect solid cash generation to be targeted for acquisitions, buybacks and dividend hikes" after a 10% increase early this year.

4. Xylem(XYL)

Company profile: Xylem, with a market value of $5 billion, provides a range of products in the transportation, treatment, and testing of water including water and wastewater pumps and filtration, disinfection, and biological treatment equipment. It is an October 2011 spin off from ITT(ITT).

Dividend Yield: 1.51%

Investor takeaway: Its shares are up 5% since its IPO. Analysts give its shares four "buy" ratings, one buy/hold," and seven "holds," according to a survey of analysts by S&P. Analysts estimate it will earn $1.88 per share this year and $2.14 in 2013, which is 14% growth.

Morningstar says the company is a "rare water pure play that deserves to trade at a premium to its diversified industrial peer group because the water industry has highly visible long-term growth drivers."

3. American Water Works(AWK)

Company profile: American Water, with a market value of $6 billion, provides water, wastewater and other related services to residential, commercial and industrial customers in the U.S. and Canada. It is the largest publicly traded U.S. water utility. Nearly 90% of its revenue comes from regulated utility markets.

Dividend Yield: 2.77%

Investor takeaway: Its shares are up 5.6% this year and have a three-year, average annual return of 26%. Analysts give its shares eight "buy" ratings, two "buy/holds," seven "holds," and one "weak hold," according to a survey of analysts by S&P. Their consensus estimate is for earnings of $1.95 per share this year, growing to $2.09 next year.

Morningstar analyst Mark Barnett says that "despite its position, we recommend that investors dial back their enthusiasm when considering this investment, as government regulation limits the profits the company can make and creates hurdles to rapid growth."

2. Pall(Pll)

Company profile: Pall, with a market value of $7 billion, specializes in making water and air filters and owns patented filtering technologies and processes.

Dividend Yield: 1.43%

Investor takeaway: Its shares are up 3% this year and have a three-year, average annual return of 35%. Analysts give its shares three "buy" ratings, one "buy/hold," four "holds," one "weak hold," and three "sells," according to a survey of analysts by S&P. S&P has it rated "strong sell," based on weaker international demand "and our view that the timing and execution of a new global restructuring program will take longer than planned to implement."

But Morningstar says the company is poised to benefit from its high-value-added filtration systems that help end users lower operating costs. They have applications in everything from water systems to the bio-pharmaceuticals industry.

1. Basic Sanitation Company of the State of Sao Paulo(SBS)

Company profile: Basic Sanitation, with a market value of $9 billion, collects, treats, and distributes water throughout the Brazilian state of Sao Paulo. The company also designs and builds water treatment facilities and distribution networks.

Investor takeaway: Its shares are up 33% this year and have a three-year, average annual return of 45%. Analysts give its shares two "buy" ratings, one "buy/hold," one "hold," one "weak hold," and one "sell," according to a survey of analysts by S&P. Analyst expect it to earn $5.31 per share this year but that will decline 35% to $3.47 next year.

Frank Byrt

04/25/12 - 05:30 AM EDT