How many public “water” companies are trading around the world? A very good measure is the extensive Bloomberg Analytics data base, which offers up 1203 companies when one enters the search term: “Water” for active/listed equities in all public markets. Over the years we have looked at virtually every one of these names, but only about 31% of this group, or 374 companies, make it into our current universe due to our selective and very stringent list requirements.

This list is not simply water utilities. In fact, water utilities represent less that 10% of this total group. The remaining companies supply the pumps, pipes, valves, filters, filtration and treatment technology, system design and construction, and other products and services to support this massive and complex global industry.

A good way to begin this discussion is to present a statistical profile of our universe as of May 31, 2005 – the point of the date being that the list changes constantly with mergers, new additions, deletions for various reasons, etc.. The universe is continually evolving and the list must be considered dynamic, not fixed.

As you can see, the total market cap in US dollars for the 374 companies is some $567.6 Billion. More descriptive, however, is the fact that the list contains 102 companies around the world with market caps above $1 Billion, and this list of 102 companies totals $508 Billion in market value, about 90% of the overall group market value.

Thus, the largest 102 companies comprise the bulk of the market value in this list, while the smaller 272 companies together represent only $60 Billion of the universe. As a practical matter, a majority of this group of 272 companies would probably not be purchased at this time (regardless of valuation) because of size and liquidity limitations, but we nevertheless want them in our universe to monitor their progress.

However, it should also be noted that a few highly select stocks from this smaller end of our universe are usually within the portfolio, and from this varying handful of small companies we have enjoyed significant performance contributions over the years.

The statistical summary above also allows us to glean other useful information, with perhaps the most important insight being the high valuation level of US water stocks versus those of the rest of the world. Note that US stocks are the highest on the list for P/E ratio and Price to Book, and also offer the lowest dividend yields.

Indeed, taking the weight of the evidence by including all of our statistical measures, the US water industry stock group emerges as the most richly valued segment, and this gives fundamental validation to the fact that our value-based strategy has been moving our portfolios away from higher priced US water equities into more reasonably valued water stocks in international markets.

We are often asked: What are the threshold requirements for a company to be included in your water universe? The answer is that we have found that it is not realistic to require precise general criteria (e.g., at least, say, 60% of revenues coming specifically from the water industry) for a company to be included on the list.

There are many reasons for this flexible approach, an important factor being variation by industry segment. For example, we might require more ‘water’ revenues from a valve company than we might require from a filtration company, or a greater percentage of stable water revenues from a foreign company than we might require from a domestic company with operations in the same industry segment.

Other factors that influence our decision to include a company are the percentage of profits (rather than revenues) that come from water, capital investment emphasis relative to the water segment of a company, longer-term goals of management relative to the water industry, acquisition plans in the water segment, and existing market penetration in those divisions of a company which are involved in the water industry.

In the end, after all of the respective fundamentals have been weighed, it can only be said that our final selection process is subjective, based upon the many years of experience that our staff and advisors represent in the water industry. It is our cumulative experience that is our true value added, and it is this depth of experience which has allowed us to create our record of low risk and stable returns over a period of many years.

Having a focused list of 374 global water companies is of little value unless an efficient method exists for selecting and monitoring the most attractive investment alternatives from this group.

We begin by valuing all of the companies on the list, at least weekly, based upon a series of 10 fundamental value criteria. These criteria include measures such as EBITDA vs. Enterprise Value, Return on Equity, PE ratio, etc. The results of the “first cut” valuation levels are then printed out on four lists by geographic region as mentioned earlier. These lists are presented graphically, so that we can easily see the companies that are getting cheaper and those companies that are becoming overvalued.

Companies appearing at the top of each of our four lists (those that appear to offer the best value) then become the subjects of further and more intensive evaluation before any final purchase selections can be made. The final analytical process is very fundamentally driven, but also may involve subjective factors such as a discussion with management and/or competitors, observations from industry members, and evaluation of the quality of management. Here again, our industry experience is key, and it might even be said that our final selection process is more of an art than it is a science, and we would have it no other way.

© 2005 John Dickerson
Editorial Archive

We are sometimes asked for a listing of our water universe companies or such related questions as: “What are your favorite companies for the China water play?” Our answer has always been that we will not make our universe generally available, and we will not discuss specific stock holdings or intentions, as this might cause competitive buying when we are trying to accumulate positions, and this would not be fair to our clients.

A couple of company names that might be of interest: GE is now the largest water industrial company in the US, due to recent acquisitions in the sector, but it is not part of our water universe because the water revenues at GE are still a small part of its total revenues. Moreover, 3M, with its recent purchase of CUNO, is not included for basically the same reasons.

And finally, our water universe contains no bottled water companies, because we consider these to be consumer product companies in the food and beverage industry, which do not enjoy the same dynamics or economics as companies in the wholesale water sector and/or companies which can help solve the inexorable problems of decreasing water supplies on a per-capita basis around the globe.