The One Question I Didn't Want To
Ask...
The Dynamic Wealth Report
December 2, 2009
I stood on an industrial site in the LA basin a few years back. It was a
large, open field surrounded by a chain link fence. Right in the middle
sat three large shipping containers.
The sun was out and it was getting warm. I was regretting my decision to
wear a suit and tie.
Why was I in the middle of this field?
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I was on a facilities tour for an investment banking client. We were
taking the company public and raising $40 million for them to expand
operations.
After a quick introduction, the workers opened the shipping containers. We wanted a closer look at the contents… we wanted to see the product in
action…
Due diligence is a key part of the investment banking game. Before you
go out and raise money from investors, you want to look under the hood. You want to check out the products and talk with the customers. Today we
were reviewing water purification equipment.
The shipping containers held industrial water filtration systems. Hook
one up to a wellhead and it will clean all the water on site. The
equipment’s pretty complex… pumps and valves are everywhere and huge
tanks hold ion exchange resins.
Water purification is becoming very high tech.
The site manager started telling us about the system. It’s priced just
right. Deployment and set up are easy. On-going maintenance is a snap. And best of all, its very effective… the system removes heavy
concentrations of nitrates found in the water.
That’s when I asked the question I shouldn’t have…
What did you use before this system?
It seemed like a simple question. I was particularly interested in the
details. See, almost a decade before, I’d attended college in the area.
For four years, I lived within a few miles of this wellhead. This well
fed water right into the water system supplying the city I lived in and
the college I had attended.
The site manager paused for a second before slowly answering… “We didn’t
do anything to the water before this.”
There was no mandate to clean the water back then. There were no
regulations or penalties for supplying slightly contaminated water.
The water filled with nitrates was pumped straight into nearby homes and
the very college I attended.
His answer made me cringe.
This is a perfect case of the more we know, the worse it looks. As our
detection and sampling technology improves, we’re able to test for
smaller and smaller amounts of contaminants in the world around us. The
water is poisoned, the food is contaminated, and the air we breathe is
toxic.
Situations like this are only going to get worse before they get better…
and somebody’s going to make money from it.
New and ever more stringent water purification rules are going to be
implemented over the next few years and decades… Let me put it this way,
I don’t see them getting more lax anytime soon!
And that means companies supplying water purification equipment should
see a consistently brisk business. One other type of company will also
see improving profits… outsourced water system providers.
Take a close look at Consolidated Water (CWCO).
The company provides water treatment and desalinization services to
several islands… and if there’s ever a place you need fresh water, it’s
on an island.
The company takes over the water production and processing for the
island… essentially an outsourced water supplier. They supply fresh
clean water and charge big bucks for the service.
How successful is this business?
Consider this… the company is on track to pay out over $0.27 per share
in dividends this year.
CWCO is expected to generate revenues over $57 million for 2009. In the
last nine months alone, they generated net income of just over $7 million.
Right now the company has an enterprise value of right around $160
million. Analysts are estimating the company will make $0.79 per share
in 2010… that’s a profit of just under $11.5 million. If those estimates
are close, it means you can scoop up CWCO for about 14x future earnings…
Not a bad deal if you ask me. Especially considering the company
provides one product everyone in the world needs to survive… and their
water supply contracts are usually negotiated for very long terms. CWCO
is a very interesting company and I think it’s a great way to play the
“clean water trend” in 2010.
*** Editors Note *** We will be attending a
corporate off-site event December 3rd through December 7th. Watch
for our next Dynamic Wealth Report article on Tuesday December
8th.
• Gold (Over $1,200 an oz)
Gold continues its record run. Fears of inflation and a weak dollar are
pushing the value of gold to record levels. Some analysts are calling
for Gold to hit $2,000 an oz… I think the estimates are low!
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