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The Last Drop

By John Bradshaw Layfield
A former All-American offensive lineman
and professional wrestler

1/7/2006 9:49 AM EST

In a world covered in water we are running out of potable water and ways to transport it. Now, before you start thinking I have been hit over the head with too many chairs in my professional wrestling career, let me give you the facts. Most importantly, I will show you how to make money off of a coming boom in the water business, with Pentair (PNR:NYSE) and Insituform Technologies (INSU:Nasdaq) among my favorites.

You can also buy water rights outright as T. Boone Pickens and the Bass brothers are doing. However, this is a big money game with a lot at stake. How much is at stake? Consider:
  • Ground water levels in the Chicago area have declined as much as 900 feet in the sandstone aquifer underlying the city and eastern Wisconsin. In Houston ground water has declined about 400 feet. The Tucson and Phoenix areas have seen a decline of 300 to 500 feet.
  • The Colorado River has not reached the Gulf of California for many years, due to the upstream water needs. Lake Powell has dropped by more than 50%.
  • Water level monitoring has taken place in some states. However, except for the High Plains Aquifer, aquifers that cross state boundaries have no coordinated level of monitoring.
  • Ground water supplies roughly 50% of Americans' direct needs. Ground water provides around 40% of the nation's public-water supply. In the past 30 years water demand has tripled while the population has grown by just 50%.
In addition, infrastructure is antiquated at best. A lot of the pipes were laid more than a century ago. It is estimated that the U.S. will need to spend up to $500 billion to replace these pipes; another $300 billion will be need for new water treatment plants. The Environmental Protection Agency estimates that 20% of the water transported leaks out of cracks in the pipes. The ability to fix pipe while still in the ground is what makes Insituform Technologies so special.

The EPA has projected the total capital needs for wastewater infrastructure to be $17 billion to $23 billion a year, up from the $13 billion a year spent now.

And this is not a U.S.-specific problem: The World Commission on Water has estimated annual investment needs in water infrastructure to increase from $75 billion to $180 billion over the next 20 years.

The desalination industry is one key to water shortages; the industry could be a $20 billion industry within five years, with almost three quarters of that in the Middle East. Texas and California have large desalination plants coming online. In Carlsbad, Calif., a planned desalination plant will be the largest in the world.

Pentair, General Electric (GE:NYSE) , Siemens (SI:NYSE ADR) , Danaher (DHR:NYSE) and ITT Industries (ITT:NYSE) have done a great job of buying up water-related companies. GE's acquisition of Ionics gave it the best pure play in desalination.

A basket of water stocks has outperformed the S&P 500 for the last 10 years, but there is still money to be made in all of this. Why? Current forecasts underestimate the amount of money that is going to be spent to upgrade this sector.

Turning Water Into Cash

Pentair is the best pure play in the water sector: 73%-75% of its revenue comes from water. Pentair's main focus is pumps, filtration and purification. The U.S. will have to almost triple spending to update its entire infrastructure and filtration plants; this is not baked into the price of PNR. We have a growth that will explode in the same way the oil industry has seen, the key is to pick the right company, and Pentair is the right company.

Pentair has made several acquisitions to become a major player in the water sector, with the most notable being its $750 million acquisition of Wicor.

In the first quarter of 2005, Pentair's water revenues were $512 million, up 63% year over year. Pentair is benefiting from the Wicor acquisition and growth in North America and China.

Pentair is more than 20% off of its 52-week high of $46.47. It has a forward multiple of roughly 18 based on consensus estimates of $2.20. Put a more realistic 21 multiple on this stock, and you have it reaching its 52-week high again. That is a 20%-plus gain.

I do not currently own shares of Pentair; however, I have set aside 5% to 10% of my portfolio this year for water stocks, and Pentair will most likely be the first.

There are other ways to play the coming water boom. Insituform Technologies is a fantastic company with a great product. It has the ability to fix pipe while still in the ground. The only problem is this company's price is way too far ahead of itself. It may look cheap at less than $20 per share, but not when you look at its trailing P/E of more than 220.

A former All-American offensive lineman at Abilene Christian University, John Layfield played professional football for the then-Los Angeles Raiders and later in the World League. After wrestling in Japan, Mexico and Europe, Layfield arrived in the WWE in the mid-1990's. A former WWE champion, JBL was a featured wrester at WrestleMania 21 and can also be seen on Friday Night SmackDown! on UPN.