The Case for Water Investing – 2007
John Dickerson and Rob Anfuso

The Economic Paradox That Spawned A Compelling Investment Theme

Background

Water, the most essential life-sustaining substance on earth and the most critical input to economies around the globe, is now at crisis levels of supply when compared to the unrelenting demand for this most basic and necessary resource. Paradoxically, water remains absurdly undervalued. In most cases, the price paid for water comes nowhere near the actual cost to provide it. We rage when our water bill increases slightly, and yet we happily pay exorbitant prices for non-essential products such as cable television. This price-to-value inequality will most certainly correct itself as the characteristics of supply and demand become more divergent, and as the knowledge of this divergence becomes more wide spread among the general public.

So how valuable is water? Ponder this: water has no substitute, regardless of price – the only commodity in the world of which this is true. This most fundamental of facts creates the inexorable and intractable demand for water that will not abate with time. Couple this demand-side certainty with the reality that our planet has a finite yet rapidly diminishing supply of usable water, and you have the underlying conditions that spawned a compelling investment theme across a diverse and expansive group of product and service providers which we define as the global water industry.

This massive industry is comprised of companies involved in the processes of collecting, treating, delivering and disposing of water and wastewater. From the water utilities that incessantly deliver potable supplies; to the myriad of technology companies involved in the treatment and analysis of water and wastewater; to the pipe, pump and valve providers involved in moving water from place to place; to the countless other businesses involved in ensuring consistent and continuous supplies of water for a multitude of purposes – all of these entities benefit from a series of interrelated and unwavering demand drivers that create consistently growing sales and earnings, irrespective of market conditions. These demand drivers and the resultant trends, which have tended to intensify as time passes, have heightened the prospects for water investing – providing (in many cases) low-risk, non-cyclical, consistent returns for public equities that fall within the water investment theme.

While the disparity between supply and demand for clean water is clearly the fundamental basis for stimulating water investment opportunities, a number of additional drivers have bolstered the argument for water investing. Around the globe, aging and dilapidated water and sewer infrastructure is in dire need of repair, and new infrastructure must be built to meet the needs of growing populations in both developed and developing economies.

These infrastructure needs in the U.S. alone are expected to cost up to $1 trillion over the next 20 years. To exacerbate this problem, massive human migrations are underway by peoples inhabiting water-stressed arid regions, who are now relocating to urban centers to avoid water scarcity issues. These unfortunate circumstances only serve to accelerate the already dire situations being observed globally, and keen water investors are positioning themselves to benefit from the heightened need for water companies that are providing solutions.

Human destruction and/or depletion of non-renewable groundwater supplies, along with the climatic changes observed with global warming, add to the critical water scarcity issues currently being faced around the world. These critical issues have become harder and harder to ignore and are now beginning to show up in mainstream media, bringing such matters to the public’s attention and informing them of the severity of the problem. This attention is causing governments at all levels to address the numerous and far-reaching tribulations of water scarcity and resultant water quality issues faced by their constituents. As a result, increasingly more stringent regulatory practices take stage, forcing cash-strapped municipalities and small privately owned water systems to succumb to the one and only available life raft – privatization, which once again benefits water investors monitoring roll-up strategies.

©2007 SUMMIT GLOBAL MANAGEMENT, INC .