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3 Water-Company Stocks Making a Splash

BOSTON ( TheStreet) -- If ever there were a time for investors to dive into water stocks, this may be it.

The prospect of long-term drought highlights a national crisis in the making at a time when cash-strapped municipalities can't afford to finance improvements of their decaying infrastructures, coupled with huge new demands for water for "hydrofracking" oil drilling.

The three biggest publicly traded water companies are seen benefiting from those themes, which has helped their share prices as they've posted gains ranging from 17% to 23% this year, versus the S&P 500's 11.5% rise. And they provide dividend yields over 2% and minimal downside risk, thanks to their monopoly-like status as a utility and lack of foreign exposure.

But investing in private water utility stocks should be considered a defensive play, given that government regulation tempers growth and profits.

S&P Capital IQ equity analyst Stewart Scharf said in a research note that the U.S. water industry generated revenues of about $136 billion in 2011, up 3% from the previous year, a pace likely to continue this year and that's expected to improve to a rate of about 5% per year over the next two to three years.

As for industry fundamentals, first, the nation is in the midst of the worst drought in 60 years, bringing attention to the prospect that climate change may make water shortages a constant challenge, which in turn increases the need for expert management.

Second, most of the nation's urban water treatment and delivery infrastructure is in dire need of replacement but cash-strapped municipalities don't have the money to improve them. The Environmental Protection Agency estimated in 2007 that it would cost about $335 billion to upgrade and repair existing systems.

And that's forcing more public/private joint ventures (there are about 2,000 now), boosting the long-term prospects of the public companies.

Finally, the hydraulic fracturing, or hydrofracking, approach to domestic oil and gas production, which involves pumping chemicals mixed with huge amounts of water underground at high pressure to fracture shale rock containing oil deposits, is creating big new opportunities for water suppliers as its needs are being met now, in many cases, from public supplies and being trucked great distances to drilling sites in rural areas.

Aqua America (WTR - Get Report) is the first to take a crack at solving that challenge, as it formed a joint venture with Penn Virginia Resource Partners (PVR Water Services) late last year and built a 24-mile private pipeline to bring water to three oil companies' drill sites in the Marcellus Shale region of western Pennsylvania. It started pumping in April and can deliver up to 3 million gallons of water a day, eliminating the need for hundreds of tanker truck trips in the process.

Aqua America's chief executive told CNBC in an interview early in July that he expects the oil field venture will add 1 cent to earnings per share this year and income from that source will grow rapidly as the company expands the service, which is not under the pricing purview of utility regulators.

Aqua America is also aggressively expanding through acquisitions. S&P said that during the eight-year period through 2011, Aqua completed 173 acquisitions or growth ventures and is targeting 15 to 20 deals in 2012.

The S&P Global Water Index, made up of 50 stocks and with a heavy weighting to foreign companies, is up 12% this year and an annual average of 12.4% over the past three years.

Here are summaries of the three biggest public water utility stocks ranked in inverse order of their share-price appreciation this year:
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