Water, A Precious Commodity

By Investopedia Staff | November 19, 2010 AAA

Water can crash in the form of a wave and it can be as soft as falling rain. But make no mistake: it is one of the more valuable resources available on the planet. Investors interested to invest in companies that provide water services ranging from flow control equipment to water treatment should consider the PowerShares Water Resources ETF (NYSE:PHO). Let's take a look at a few of the fund's key holdings. (Before investing in ETFs, be sure to check out Five ETFs Flaws You Shouldn't Overlook.)

Not Just Water
Flowserve (NYSE:FLS) is a water infrastructure play that also serves oil and gas, power generation and chemical processing providers. As a multifaceted supplier of pumps, valves, seals and automation, Flowserve is expected to report an impressive earnings per share (EPS) of $6.95 for 2010. Flowserve believes a combination of population growth and urbanization will be key growth drivers pushing the demand for water services and energy production, which should translate into future earnings growth. Financial ratios do not tell the entire story for any company, but Flowserve offers a respectable price-to-earnings growth (PEG) ratio of 1.89 based on projected EPS long-term growth of 8%, which suggests expected earnings growth over the next five years. Other infrastructure players listed in the PHO fund with relatively low PEG ratios include ITT (NYSE:ITT), with a PEG of 1, on projected 10.6% EPS growth, and IDEX (NYSE:IEX), with a PEG of 1.08 based on 17.25% growth. (For more on the PEG ratio as an analysis tool, read Move Over P/E, Make Way For The PEG.)

Integrated Water Treatment
Nalco (NYSE:NLC), a global integrated water treatment and process improvement company, recently declared a quarterly cash dividend payment of 3.5 cents per share. Strong sales in Nalco's energy services segment along with improving sales in North America and Latin America helped the company improve revenues to $1.09 billion in the recent quarter, which was a surge of 14% as compared to the same quarter in 2009. Nalco has a low PEG ratio of 0.89 based on a 21.25% projected EPS growth rate.

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Active Carbon
Calgon Carbon
(NYSE:CCC), which specializes in water purification through the use of activated carbon and innovative treatments, managed to report income from operations of $14.6 million, as compared to $14.1 million for the third quarter of 2009. Net income came in at $10 million versus $13.9 million for the comparable period in 2009. In other words, the company earned $.18 cents per fully diluted share versus $.25 in the comparable period a year ago. This outcome was just enough to meet analyst expectations. Calgon Carbon also has a relatively low PEG ratio of .98 (based on 21.6% EPS growth rate).

Final Thoughts
Renewable energy is the tagline for green jobs and investments in ethanol, solar, wind and geothermal power, but water is an equally important resource for investors to consider. (For more, see Water: The Ultimate Commodity) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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