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Water, More Precious Than Gold

NEW YORK (TheStreet) -- Visiting a museum in Sacramento, Calif., years ago I happened on a sculpture of a bone-dry gold prospector crawling through the desert looking for . . . not gold, but water.

My imagination followed the scene through to a flock of California Condors picking the meat off his bones after he perished from thirst. It's a macabre thought, but it dramatically portrays the importance of clean water.

Water is a substance that's easy to take for granted . . . until there's not enough of it. It's in short supply in many areas of the world, and the widespread areas of severe drought this summer exacerbate the challenges.

According to the World Health Organization, "The amount of fresh water on earth is limited, and its quality is under constant pressure. Water quality can be compromised by the presence of infectious agents, toxic chemicals and radiological hazards."

That's why I've been researching companies that are in the "water business".

Allow me to introduce you to a company that's been dealing with this pressing need for over 120 years. American Water Works (AWK) knows first-hand that you can live without gold, but you can't survive without water.

They also know how to survive and thrive as a company. Not only do they provide water and waste-water treatment services in 30 states and parts of Canada (serving over 15 million people), but they have mastered the challenge of providing clean water dependably. In their own words:

Our business is unique - when customers aren't thinking of us regularly, that's typically a good sign. It means we are delivering on our promise of ensuring our customers have high-quality, dependable water service. And it's more than just working with our customers. It's working with elected officials, engineers, and contractors to make sure we meet our customers' needs and make wise investments in the future.
Through our years of experience, we've learned that one solution does not fit all. Across the country, we work with cities and communities of all sizes to help them solve their unique water and wastewater needs and challenges.
Our expertise and knowledge of the industry allows us to consolidate the efforts that go into building a new, or updating an older facility. We help by managing the design and building process, and operating and maintaining the project once it is complete. We also help our customers by developing infrastructure plans, making upgrades, as well as operating and maintaining water and wastewater systems and treatment plants that treat water from rivers, lakes, and reservoirs.

What good is waking up and smelling the coffee if the water the coffee was made with is contaminated and toxic? AWK isn't in the coffee business, but from their />user-friendly and fascinating web site you'll discover a company that has found the key to success in their industry, and they make plenty of money doing it right.

Shareholders enjoy a dependable $1-per-year dividend from AWK, the largest publicly traded U.S. water and wastewater utility company.

On Aug. 2, they reported increases in revenue, net income and earnings per share for the second quarter ended June 30, as compared to the second quarter of 2011.

"Our results reflect the continued execution of our strategic initiatives to drive operational excellence and continuous improvement, expand in attractive markets and maintain strong financial discipline," said Jeff Sterba, president and CEO of American Water.

"In addition, hot and dry weather in a number of our states led to record pumpage, which had a significant impact on earnings. While not exact, we believe this added in the range of 6 cents to 9 cents to earnings per share for the second quarter."

Compared to other water companies like Aqua America (WTR) you can see from the price comparison chart below that AWK has been doing a very good job of opening up the earnings spigots and pouring out some very nice capital gains for its investors.

AWK ChartAWK data by YCharts

For the second quarter of 2012, American Water Works' revenue increased 11.5%, or $76.7 million, over the comparable quarter in 2011 to $745.6 million. Operating expenses for the three months ended June 30 totaled $475.0 million, an increase of $7.5 million, or 1.6%, compared to the same period in 2011.

Net cash provided by operating activities for the six months ended June 30 was $316.9 million, compared to $262.4 million for the second quarter in 2011, a 21% increase which was primarily driven by the gains in their operating revenues and changes in working capital.

Alternative Investments

There are other ways to invest in the business of water, and that's in companies that have acquired and owned water rights.

An example of this is La Jolla, Calif.-based PICO Holdings (PICO). Together with its subsidiaries, PICO engages in the water resource and water storage business as well as real estate, insurance and other agribusiness activities.

It's Water Resource and Water Storage division acquires and develops water resources and water storage operations in the southwestern U.S. Their Real Estate segment acquires and develops partially developed and finished residential housing lots in selected markets in California and Washington.

Although they don't currently have much in the way of earnings right now, it's for good reasons. They've been acquiring an impressive portfolio of assets that they've purchased at distressed pricing.

"As an acquirer of undervalued businesses and hard assets, since the financial crisis in 2008, our primary focus has been on acquisitions," they state in their worthwhile annual letter to shareholders.

As real estate markets have been improving, PICO has been selling some of their assets and real estate to generate income. Their Web site is a must-read for anyone who might want to invest in PICO shares.

Here's a chart that shows the recent history of PICO share's price as compared to their revenue-per-share. It may be suggesting that the share price might soon be catching up with revenue growth.

PICO ChartPICO data by YCharts

These water-related companies mentioned in this article are trading at or near their 52-week highs (except for PICO). I'm not suggesting that you chase these stocks. I am encouraging you to thoroughly familiarize yourself with what they do, how they make money and why they are positioned in business operations surrounding a substance that, besides oxygen, we can't live without.

May all your water be clean and pure!

At the time of publication the author isn't long or short any companies mentioned.

Make smarter trading decisions and provide investment ideas that could help make you richer. Bryan Ashenberg does the dirty work so you don't have to!

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: AWK, WTR, PICO 

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