Severe drought and dropping water levels are impacting economies around the world. Declining levels of the Yangzte river in China have led to a shortage of hydropower, hitting the operations of several companies. Furthermore, lower levels of the Rhine river have compounded supply chain challenges in Germany and also led to the seepage of saline water into reservoirs in the Netherlands. A drop in the Colorado river has triggered compulsory water cuts in Arizona, Nevada, and Mexico and the second year of shortage. Nonetheless, the equity universe continues to offer attractive opportunities and today we highlight three names that could benefit from the situation.
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Ecolab (ECL) (GB:0IFA)
Ecolab caters to almost three million customer locations and is a leader in water, hygiene, and infection prevention. The company sees its market opportunity at $152 billion and already provides solutions in over 170 countries.
In the current challenging macro environment, Ecolab has seen pricing as well as volume gains. It expects pricing increases to stay ahead of inflation and is now focusing on new business development.
Ecolab’s revenue has ticked upwards from $11.8 billion in 2020 to $12.7 billion in 2021. The figure is expected to rise further to $15 billion in 2023. Concurrently, EPS is expected to expand to $5.83 in 2023 from $4.69 in 2021.
ECL shares have gained nearly 12% in the past month and the Street expects a further 5.1% potential upside based on a consensus rating of Moderate Buy and an average price target of $180.54.
But perhaps the icing on the cake comes from the fact that Microsoft (MSFT) Founder Bill Gates (who is also one of the largest farmers in the U.S.) has picked up Ecolab shares worth $77 million in the past month alone. Gates is well known for his focus on sustainable growth and Ecolab seems to be aligning perfectly with the billionaire investor’s checklist.
Badger Meter (BMI)
Badger Meter’s water technology solutions include flow measurement, quality, as well as other parameters. Its offerings help customers optimize their operations and use water sustainably.
Revenue has increased from $425.5 million in 2020 to $505.2 million in 2021. It is expected to grow to $570.6 million in 2023. Importantly, the company’s bottom line is seeing an acceleration with EPS rising from $1.69 in 2020 to $2.08 in 2021. It is expected to increase to $2.47 in 2023.
Badger continues to perform on the back of robust demand, pricing gains, and a strong order backlog. Additionally, its utility water sales continue to rise owing to the performance of its E-Series Ultrasonic meters, ORION cellular endpoints, and BEACON SaaS revenue.
Impressively, Badger’s solutions are at play at different locations including drinking water, chlorine monitoring, breweries as well as wastewater treatment.
While shares have run up 24.3% over the past month, Maxim Group’s Tate Sullivan sees a further 23.5% potential upside in the stock with a Buy rating and $125 price target.
Badger continues to drive shareholder value and has this month increased its quarterly dividend by 12.5% to $0.225 per share. This marked the company’s 30th consecutive year of increasing dividends. Its dividend yield now stands at 0.79%, with a payout ratio of 36.53%.
Primo Water (PRMW) (TSE:PRMW)
Operating a recurring razorblade revenue model, Primo provides water solutions in North America and Europe. It provides water dispensers that help drive household penetration and recurring revenue for the company. It also offers prefilled and reusable containers, and water refill units. Primo’s water filtration unit footprint stretches across 21 countries.
Like the other two names on our list, Primo’s top line too has expanded from $1.95 billion in 2020 to $2.07 billion in 2021 and is further anticipated to rise to $2.32 billion in 2023. Simultaneously, EPS has increased from $0.55 in 2020 to $0.56 in 2021, and is expected to expand to $0.81 in 2023.
Further, Primo continues to see higher pricing, volumes, as well as customer growth. This month, the company announced a $100 million share buyback program alongside a quarterly dividend of $0.07 per share. This puts the company’s dividend yield at 1.84% with a payout ratio of 31.59%.
Furthermore, at 31.03%, Wall Street sees the highest potential upside in Primo as compared to the other two names on our list today. This upside is based on a Strong Buy consensus rating and an average price target of $18.75.
What Stocks do Well in a Drought?
Receding water levels, increasing salination, and challenges about adequate water supply are beginning to haunt a number of industries. At such a time, these three names have proven to be resistant to these trends and seem to be well positioned to deliver shareholder returns.
At the same time, the Invesco Water Resources Portfolio ETF (PHO) and the Invesco S&P Global Water Index ETF (CGW) have both gained 14.1% and 10.3% respectively, in the past month as well.
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