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“Forget It Jake, It’s Chinatown”

Water Use Graph from UN Water
Water Use Graph from UN Water

One of my favorite long-term investment themes is the growing importance of water. 97% of the world’s water is salt water and only 3% is fit for human use. As the world population grows, more water is needed for consumption, but an even greater amount is needed for production of food – the chart above shows that 70% of water is currently used for irrigation.

The estimates I have seen for world population growth show that we will have 9.2 billion people on Earth by 2050.

world-population-1800-2100
World Population 1800-2100 from Wikipedia

Most of that population growth will happen in the developing world. This is the same developing world whose demographics are following the pattern set by the US and Western Europe after WWII, with the Middle Class providing a producing and consuming society that grows GDP. With the growth of GDP and the Middle Class come expectations for more meat and dairy in the daily diet.

Water Use Percentage from UN Water
Water Use Percentage from UN Water

The production of meat and dairy requires much more water usage than eating rice. It requires 1800 gallons of water to produce one pound of beef according to National Geographic. As

So, as the population grows and as the Middle Class swells in the developing world, the need for fresh water will increase faster than the percentage growth in the population. Because of this, companies that have proficiencies in desalination, water flow, efficient water distribution, etc., will have a Macro earnings catalyst behind them that should propel them forward in the years to come.

Water wars have happened in the past. According to an article from the Wharton School: “Water has always been linked to economic development, political maneuvering and the threat of violence, even in ostensibly stable places far from the desert and the agricultural economy. In the early days of American independence, New York and Philadelphia battled to be the new nation’s dominant city. One reason New York emerged victorious: It purchased the rights to much of the water between the city and Canada, bringing it into town via an elaborate system of aqueducts, and rendering the city a safer, cheaper and more hygienic place than its erstwhile competitor.

“Later, as the American population spread into the parched far west, the politics of water created and lost fortunes. Modern Los Angeles was made possible in large part by the 1913 opening of a 233-mile aqueduct that brought water from the Owens Valley in the Sierra Nevada Mountains; one of the city’s most famous streets, Mulholland Drive, was ultimately named for the engineer of the project. The graft-ridden manner in which the water rights were acquired led to violent clashes with Owens Valley farmers that became known as the California Water Wars.”

Our clients own some companies, large and small, that have water divisions focused on varying aspects of the water industry:

Itron, Inc. [ITRI]:
Itron, Inc. (Itron) provides a portfolio of products and services to utilities for the energy and water markets worldwide. The Company, along with its subsidiaries, is a provider of metering, data collection, and utility software solutions. It has two segments: Itron North America and Itron International. Itron North America generates its revenue in the United States and Canada and offers meters and data collection and communication systems for electric, gas, and water utilities. Collection and communication systems include advanced metering infrastructures/automated meter reading (AMI/AMR) systems and a range of utility software and services. Itron International generates its revenue in Europe and South Africa, South America, and Asia/Pacific. Itron International offers a range of electricity, gas, water, and heat meters, AMR and AMI systems, software, and services.

Nalco Holdings [NLC]:
Nalco Holding Company provides integrated water treatment and process improvement services for industrial and institutional applications, combining chemical products and equipment, and on-site service and expertise. It operates in three segments: Water Services, Paper Services and Energy Services. The Water Services segment serves the global water treatment and process chemical needs of the industrial, institutional, and municipal markets. Paper Services segment serves the process chemicals and water treatment needs of the global pulp and paper industry. Energy Services serves the process chemicals and water treatment needs of the global petroleum and petrochemical industries in both upstream and downstream applications.

Northwest Pipe Co. [NWPX]:
Northwest Pipe Company is a manufacturer of large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, primarily related to drinking water systems. The Company’s pipeline systems are also used for hydroelectric power systems, wastewater systems and other applications. It manufactures water infrastructure products through its Water Transmission Group, which during the year ended December 31, 2009, generated approximately 76% of its net sales. In addition to manufacturing water infrastructure products, it also manufactures other welded steel products through its Tubular Products Group, which in 2009, generated approximately 24% of its net sales. The Company’s Tubular Products Group has the capability to manufacture a range of small-diameter, electric resistance welded (ERW) steel pipe for use in a range of applications, including energy, construction, agricultural, industrial, and traffic signpost systems.

Watts Water Technologies [WTS]:
Watts Water Technologies, Inc. is a provider of water quality, water conservation, water safety and water flow control products for the residential and commercial markets in North America and Europe. The Company operates in three segments: North America, Europe and China. It distributes its products through three primary distribution channels: wholesale, do-it-yourself and original equipment manufacturers. The Company also sells products for the residential construction and home repair and remodeling industries through DIY plumbing retailers, national catalog distribution companies, hardware stores, building material outlets and retail home center chains and through plumbing and heating wholesalers.

Keppel Corp Ltd [KPELY]:
Keppel Corporation Limited is a Singapore-based investment holding and management company. The principal activities of the Company along with its subsidiaries consist of offshore oil-rig construction, shipbuilding and ship repair and conversion; environmental engineering, power generation and network and logistics; property development and investment and property fund management, desalination, and investments.

From the standpoint of near-term performance, some of these companies have performed better than others. However, each of them attacks a part of the problem and should over the long-term outperform the broader market on average through a combination of earnings growth and P/E expansion. At least that is the theory we are working from at this time.


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