Water is an economic paradox. Everyone needs it, but it’s often cheap because it’s usually, but not always, in abundance; it just falls from the sky. However, good water resources are not abundant, which means that
Evoqua Water Technologies,
a water treatment company, a good stock to tap into.
When it comes to water, Evoqua with a market cap of $3.9 billion (ticker: AQUA) serves more than 38,000 customers with more than 200,000 installations in industries such as electronics, manufacturing, chemicals, utilities, refining and even theme parks. Someone has to treat all the water on slides.
The business has not always been easy for Evoqua. The company started as
’ (SIE.Germany) water technology unit before it was bought by private equity and sold to public investors in late 2017. The stock had a rough start. Management struggled to meet its guidelines, causing the stock to fall from $18 at the initial public offering to less than $8 a year later. The stock has since climbed about 300% from the bottom to $32.80, with the same management team and nearly identical strategy. What has changed is that investors have become more familiar with it and the order patterns. And with demand for water treatment growing, inventory gains should continue.
Finding a way to play water doesn’t seem difficult. As with anything, there are exchange traded funds on the theme. For example the
Invesco Global Water
ETF (PIO) shows what makes Evoqua unique. The ETF includes companies that make water heaters such as:
(AOS); distributing sanitary supplies, such as
(FERG.UK); and act as water companies, such as
(AWK). There is a healthcare industrial giant
(DHR), which has a filtration business, while
(ROP) derives part of its turnover from water measurement. However, Evoqua is one of the few listed companies that is all about water and plays an essential role in almost the entire water chain.
The demand for water is growing worldwide at about 1% per year. That doesn’t sound like much, but every year more people and the same amount of water create scarcity. In addition, the United Nations estimates that 44% of domestic wastewater is not treated safely. All together, the global water services market is $85 billion. Evoqua estimates its addressable market at approximately $16 billion. And with $1.5 billion in revenue forecast for 2022, there’s a lot of profit to be made.
|2022E Turnover (million)||$1,546|
|2022E Net income (million)||$110|
|Market value (car)||$3.9|
E = estimate
There is also a good chance that the Biden administration will designate PFAS, a chemical created a generation ago that leaked into groundwater, as a hazardous substance. If that happens, the Environmental Protection Agency could require manufacturers to clean it up, costing tens of billions of dollars, says Gordon Haskett analyst John Inch. Evoqua is one of the few companies with multiple solutions for removing PFAS from water.
It is also probably the only water company with a national footprint that can do this. The water treatment sector is fragmented and Evoqua faces little competition from large, listed companies. That gives Evoqua the opportunity to add revenue through mergers and acquisitions. The company has made nine purchases since it went public in late 2017. The most recent: the April 2021 purchase of Water Consulting Specialists, a treatment systems designer, for an undisclosed sum.
Evoqua is more than a blind gamble on water investing. In addition to mergers and acquisitions, there are positives that should drive above-average earnings growth, including what RBC analyst Deane Dray calls a “highly differentiated outsourcing model.” Evoqua’s pay-per-the-gallon approach has made it the best treatment company for many industries. “Evoqua is building a highly profitable portfolio of outsourcing clients with five-year contracts with renewal rates in excess of 95% that it can monitor digitally and optimize maintenance schedules,” said Dray.
As a small cap, Evoqua’s earnings can be volatile, as history shows. The company has missed quarterly earnings estimates nearly half the time since its IPO. Still, Evoqua is expected to grow earnings at a clip of 17%, compared to the average annual earnings per share of 10% of the company.
index over the past five years, while revenue is expected to reach $1.7 billion in three years, up 20% from $1.4 billion in 2020.
Such growth has a price. Evoqua is trading at 36 times its 2022 estimated earnings of 91 cents per share, much higher than the S&P 500’s 21 times. However, any solid growth stock trades at a premium, which is especially true for a company like Evoqua with growing market share. in environmental, social and governance companies.
For his part, Dray has a Buy rating for Evoqua stock and a price target of $38, up more than 15% from Friday’s close. Even if the stock reached $38, Evoqua would remain a core holding for growth-oriented investors for years to come. “Scarcity is a reality in the water technology sector,” says Dray. “There are just few publicly traded companies in this space and a seemingly unquenchable demand from investors.”
Write to Al Root at email@example.com