The One Question I Didn’t Want To Ask…

| December 2, 2009 | 0 Comments

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?

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.

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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