The 8 Best Water Stocks: How To Profit From One Of Life’s Bare Necessities

The good news is that Olin management expects these issues to be short-term in nature. The company expects higher volumes and operating rates across its chlorine, chlorine-derivatives, and epoxy products businesses. It also expects approximately $25 million of lower maintenance turnaround costs and improved caustic soda pricing. Plus, the multiple one-time charges that occurred in the first half are not expected to repeat in the second half of the year.

As a result, management maintains an optimistic long-term outlook for the company.

 

Source: Investor Presentation

Olin stock trades for a price-to-earnings ratio of 16.5x, which is well above our fair value estimate of 10.0x. The fair value estimate P/E is based on the 10-year historical average. As a result, the stock appears overvalued, which is expected to limit its future returns. A retracement of the P/E ratio to our fair value estimate would reduce annual returns by 9.5% per year over the next five years.

Future EPS growth (expected at 10% per year), as well as the 4.4% dividend yield, will push Olin’s total returns into positive territory, but total expected returns of 4.9% per year make this stock is a hold in our view.

Water Stock #7: Franklin Electric (FELE)

  • Expected Return: 5.8%

Franklin Electric Company makes the list because it provides systems and equipment for moving water and fuel. It manufactures electric motors, pumps and controls that allow customers to pump freshwater, wastewater and fuel. As a result, its business model is heavily involved in water.

It also manufactures flexible piping, gas recovery systems and tank monitoring devices for the petroleum sector. The company was founded in 1944 and generates $1.3 billion in annual sales. Almost half of its sales come from international customers.

In late July, Franklin Electric reported (7/23/19) financial results for the second quarter of fiscal 2019. In North America, sales of groundwater products continued to be adversely affected by the record precipitation in the first half of the year. Nevertheless, the company grew its total revenues 3% and its adjusted earnings-per-share 8%.

Despite the strong results, the extremely adverse weather in the first half of the year caused management to lower its earnings-per-share guidance for the full year. Franklin Electric now expects 2019 EPS in a range of $2.15-$2.25, down from prior guidance of $2.37-$2.47.

That said, whether in the U.S. normalized in recent weeks, while the company continues to enjoy strong business momentum in International Water Systems and Fueling Systems markets. We expect a 7% annual EPS growth over the next five years. Revenue growth will fuel the company’s future earnings growth. Franklin Electric’s growth will be boosted by its recent acquisition of First Sales, LLC, a manufacturer of water treatment and filtration equipment for the residential and commercial markets.

First Sales designs, manufactures and distributes its products under the Sterling Water Treatment and Avid Water Systems brands. First Sales had sales of approximately $14 million last year. Franklin Electric expects the acquisition to be accretive to the company’s EPS in 2020.

Franklin Electric stock trades for a 2019 P/E ratio of 20.5x, significantly above our fair value estimate of 18.1x, which is equal to the 10-year historical average. A declining P/E multiple could reduce annual returns by 2.5% per year. The company’s 7% expected EPS growth rate, as well as the 1.3% dividend yield, will offset the impact of overvaluation. Total returns are expected to reach 5.8% per year through 2024, qualifying the stock as a hold at this time.

Water Stock #6: Xylem Inc. (XYL)

  • Expected Return: 6.1%

Xylem has only been an independent company since 2011 when it was spun off from ITT Corporation. But it plays an important role in the water business. It is a machinery company that designs, manufactures and sells engineered technologies for the water industry.

Its portfolio for water and wastewater applications includes products for the full cycle of water: collection, distribution, use, and the return of water to the environment. Xylem has a market capitalization above $13 billion.

Xylem reported strong second-quarter financial results. Organic revenue increased 5% to $1.3 billion. Xylem saw double-digit sales growth in the U.S. last quarter. Adjusted EPS increased 10% from the same quarter last year.

The company’s Applied Water segment, its largest business, posted strong growth last quarter.

 

Source: Investor Presentation

For the full year, Xylem expects organic revenue growth of 5% to 6%. Adjusted EPS is expected to increase 8% to 12% this year, to a range of $3.12 to $3.22.

Xylem continues to expect a strong year from each of its end markets in 2019.

 

Source: Investor Presentation

For the full year, Xylem expects organic revenue growth of 5% to 6%. Adjusted EPS is expected to increase 8% to 12% this year, to a range of $3.12 to $3.22. The long-term outlook remains extremely positive for Xylem. The company has grown its earnings-per-share at a highly attractive 10% pace since the company went public in 2011.

It should have little trouble continuing its growth in future years. Water is a valuable resource that is critical for everyone’s life. Awareness about the importance of water usage is growing, and has made the products Xylem offers more important. Both tools for the analysis and control of water, as well as Xylem’s technology for moving water and wastewater, are experiencing growing demand.

Xylem stock trades for a 2019 P/E ratio of 24x, compared with our fair value estimate of 19.0x. As a result, we view the stock as slightly overvalued, and a declining valuation multiple could cut into total returns by 4.6% per year. Expected EPS growth of 9.4% per year, as well as the 1.3% dividend yield, result in total expected returns of 6.1% per year through 2024.

Water Stock #5: Algonquin Power & Utilities (AQN)

  • Expected Return: 8.7%

Algonquin Power & Utilities Corp. is headquartered in Canada. The stock trades on both the Toronto Stock Exchange and New York Stock Exchange under the ticker, AQN. The renewable power and utility company was founded in 1988. Algonquin’s market cap is $6.1 billion. The company has increased its dividend every year since 2011.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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