The Rude Awakening
Wall Street, New York
Thursday, June 15, 2006 ------------------------- - Drink up! Drink up! Before the pipes crack and the
taps run dry,
- A few ways you can invest in water in your own back
yard,
- Have the markets found a bottom? All the week's data
and plenty more...
------------------------- Eric Fry, reporting from amply irrigated Westchester
County, New York... Last Friday, your New York editor strolled into the
Roosevelt Hotel in Midtown Manhattan to attend the first-
ever Gabelli Water Infrastructure Conference. After
registering with the cheerful hostesses, he helped himself
to a forgettable lunch buffet, en route to locating his
colleague, Chris Mayer, the editor of Capital and Crisis. As your editor began eating his over-cooked fish, and half-
listening to the presentation underway, he found himself
surrounded by water. The stuff was everywhere. Pitchers
full of ice water seemed to outnumber attendees, and your
editor was grateful for the ample supply. The previous
night he had, apparently, sipped one margarita more than
prudence would have allowed. As your editor doused his thirst with glass-after-glass of
ice water, the day's presentations seemed all the more
relevant and compelling. The conference featured U.S.
companies that conduct mostly U.S.-based activities. Hence,
none of the presenters could boast about purifying the
polluted drinking waters of Bangladesh or Beijing. But they
could, and did, boast about installing, replacing and/or
upgrading America's crumbling water infrastructure. One-by-one, executives from America's leading water
companies strode to the podium to describe their unique
accomplishments and future opportunities. As your editor
absorbed these presentations, he became increasingly
impressed by the enormity of America's water
challenges...and of the enormity of the investment
opportunities these challenges could provide.
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Parched
By Eric J. Fry The average New Yorker buys a new toothbrush every three
months, but he brushes his teeth with water that flows
through 100-year old tunnels and pipes. The water infrastructure in most of the rest of the nation
isn't much newer than Manhattan's. It should be no
surprise, therefore, that water pipes are rusting and
crumbling all across this great land of ours. The nation's
alarmingly decrepit water infrastructure will require a $1
trillion overhaul over the next twenty years, according to
the American Society of Civil Engineers (ASCE). This
massive infrastructure spending will mean big business for
many water infrastructure companies. "America's crumbling infrastructure is eroding our quality
of life," the Midwest Contractor warns. "In its 2005 Report
Card for America's Infrastructure, the American Society of
Civil Engineers ASCE assigned a cumulative D grade to the
nation's infrastructure, saying that the condition of
roads, bridges, drinking water systems, and other public
works have shown little to no improvement since ASCE graded
them a D-plus in 2001. Grades in all the categories range
from a high of C-plus for solid waste to a low of D-minus
for drinking water, navigable waterways and wastewater." 
America's "D-" water systems would probably receive a
passing grade in most parts of the world, but they are
still very far from an "A." According to the EPA, the
nation's 55,000 community drinking water systems and 16,000
wastewater treatment systems face "staggering public
investment needs" over the next 20 years. Repairing the nation's water-supply infrastructure will
cost hundreds of billions of dollars over the next two
decades. That's bad news for the municipalities, tax-payers
and rate-payers that will have to foot the bill, but very
good news for the companies that will be sending the bills. Enter companies like Aqua America (NYSE: WTR), Northwest
Pipe (Nasdaq: NWPX), Mueller Water Products (NYSE: MWA) and
PW Eagle Inc. (Nasdaq: PWEI).
Aqua America, for its part, is busily buying up municipal
water systems in 13 different states, and spending millions
to bring them into compliance with stringent new EPA
guidelines. Even if some municipalities would be content to
tolerate an excess of arsenic in the local water supply,
the EPA is not. The EPA's new dispensations would require many
municipalities to make improvements that they cannot
afford. Thanks to this assist from the EPA, therefore, Aqua
America is finding itself in a buyer's market for municipal
water systems. 
Meanwhile, companies like Mueller Water Products are
capitalizing upon a much more rudimentary problem: many
water pipes and valves are simply too old to do the job
effectively. According to the EPA, nearly 25% of the nation's water
pipes are "poor, very poor or elapsed." Even worse, the EPA
expects that percentage to increase to 45% by 2020...unless
something is done about it. 
"Many systems have reached the end of their useful design
lives," the ASCE reports. "Older systems are plagued by
chronic overflows during major rain storms and heavy
snowmelt and, intentionally or not, are bringing about the
discharge of raw sewage into U.S. surface waters. The U.S.
Environmental Protection Agency (EPA) estimated in August
2004 that the volume of combined sewer overflows (CSOs)
discharged nationwide is 850 billion gallons per year...If
the nation fails to meet the investment needs of the next
20 years, it risks reversing the public health,
environmental, and economic gains of the past three
decades." Mueller hopes its pipes and valves will provide a major
part of the solution. Mueller only started trading as a
public company on May 26th. But most of us – and most of
our dogs – have known this company from birth. It
manufactures about half of all the fire hydrants in the
country. Mueller's stock, which sells for about 27 times
earnings, is hardly cheap. But all major U.S. water stocks
command a premium valuation. The portfolio of the
PowerShares Global Water Fund (NYSE: PHO), for example,
carries an average PE of 28. We have no idea if these water stocks are worth their
premium pricing. But we have some idea that business will
be booming for a very long time in the U.S. water
infrastructure industry.
[Joel's Note: The global water crisis is looming and,
unlike other resources, water does not enjoy the luxury of
a substitute. Peak oil, housing prices, inverted yield
curves and the rate at which you replace your tools of
dental hygiene are all debates that mean nothing if we do
not have clean water to drink. Without this most
fundamental of resources, nothing else matters.
Population growth is placing higher demand on water, a
finite and irreplaceable resource. Pollution, inadequate
and aging infrastructure, global weather patterns and a
multitude of other drivers are ensuring that water
shortages will be brought to the fore of everyone's
attention before too long. Already interest in both the
public and private sectors are creating some major
opportunities for early investors. Chris Mayer of Capital & Crisis and your own Rude team have
been scouring the globe to find the most profitable ways
you can invest in a future of clean water. Stay tuned for
the release of this very special report in the coming
weeks.
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