This Company’s No Pipe Dream!

| September 2, 2010 | 0 Comments

Let me give you fair warning.  The following statistic could make you sick to your stomach.

According to the EPA, as much as 860 billion gallons of sewage are dumped into our beautiful rivers and lakes every year.

Most of this waste comes from combined sewage systems built in the 19th and early 20th centuries.  These outdated systems handle both storm water and sewage.  The problem is they were designed to overflow during heavy storms.

As you might imagine, they’re now viewed as a threat to public health and the environment.

The big question of course is what’s behind this crisis?

Simply stated, America’s sewer systems are aging and in some cases becoming unusable.  A portion of our sewer pipes are significantly decayed.  And this is causing leaks, voids, and overflow issues.

How bad are they?

Bad enough for the American Society of Civil Engineers to give wastewater infrastructure a D- on their 2007 report card.  It was the worst grade given for any infrastructure category.

Clearly, our national wastewater treatment system needs major repairs.

This rapidly decaying infrastructure is nothing less than a ticking time bomb.  Federal, state, and local governments have no choice but to step up investments in wastewater treatment infrastructure.

Of course, it’s going to take a monumental effort and a ton of money.

The Associated General Contractors of America say “modernizing and replacing aging water infrastructure may be the single largest public works endeavor in our nation’s history.”  And the EPA estimates the project will cost a whopping $400 to $600 billion over the next 20 years.

Fortunately, the federal government is already loosening up the purse strings.

The American Recovery and Reinvestment Act of 2009 allocated $4 billion for wastewater treatment.  A bill passed by the House authorizes $19.4 billion over five years.  And a Senate bill authorizes more than $20 billion over five years.

The last two bills are still working their way through Congress.  But it looks like the government is getting ready to spend big bucks on wastewater treatment infrastructure.

This is great news for one particular company.

Allow me to introduce Insituform Technologies (INSU).

INSU is a leading global provider of sewer pipeline rehabilitation services.  They also provide rehabilitation and corrosion protection for drinking water, energy, and mining pipelines.

In 1971, INSU developed their flagship cured-in-place-pipe (CIPP) process.  It’s a trenchless technology for rehabilitating sewer pipelines.  Over the past 40 years, INSU has used CIPP to reconstruct more than 17,000 miles of underground pipe infrastructure worldwide.

Municipalities love CIPP because they don’t have to dig up the streets to fix their sewer systems.  In other words, CIPP saves them a huge amount of time and money.

Despite the challenging economy, business is booming at INSU.

Take a look at the company’s sizzling first half 2010 numbers…

Revenue jumped 38% to $429 million.  Net income more than quadrupled to just over $24 million.  And earnings soared 313% to $0.62 per share.

And there’s more to come in the second half…

The company’s CEO recently said “market conditions are continuing to improve on a global basis.”  And he tightened up earnings guidance for the year to a range of $1.50 to $1.55 per share.

I’m sure the company’s hefty contract backlog was also behind the glowing outlook.  INSU is sitting on a staggering $475 million in orders.  This backlog will gradually be converted into revenue as the company completes the contracts.

But here’s the crazy part…

INSU shares are badly misvalued.

At a recent price of $21.51, the shares are trading at just 14x the 2010 estimate of $1.53.  That’s a low P/E for a company expected to grow earnings 24% a year.

In fact, INSU is sporting a paltry PEG ratio of 0.55.

These shares could easily trade up to $31 or more over the next year.  That’s upside potential of at least 44%.  Not too shabby in this up and down market.

Take a closer look at INSU for your own portfolio.

The massive wastewater treatment infrastructure rehabilitation project should provide steady revenues for years to come.  Plus, the energy and mining pipeline rehabilitation business offers huge additional upside.  Best of all, the recent pullback gives you an opportunity to get in at a nice discount.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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