NEW YORK, NY / ACCESSWIRE / August 25, 2015 / We've all heard about the extraordinary drought plaguing California from four consecutive years of meager rain and snowfall. Some of us have seen the pictures of the devastation, of dry riverbeds, lakes that no longer exist, even of black water running from the tap in some communities literally running out of drinking water. Perhaps scarier still, how the California State government has even gone to the lengths of trying to regulate how long people shower.
The common thread here is the utter helplessness against the situation, because nobody can control the weather.
With a potentially historic El Nino affect forecast to hit the US this winter, California's dire situation may yet be eased by an especially rainy winter, but the problem remains, how long can mankind lay helpless in total reliance on weather patterns we cannot control for the water we need? An exact timeline is, as usual, impossible. But the answer still is, Not much longer.
In the coming years, due to the extreme droughts that have recently hit Texas and California, the two most populous States in the Union with 66 million people between them, we are likely to see resurgence in the water reclamation and treatment industry spearheaded by both governments and the private sector.
In the face of this, investors will want to look at both the large companies already in play, as well as the smaller ones poised to capitalize. The relief coming to California in the form of El Nino is likely to buoy the larger companies in the space like California Water Service Group (NYSE:CWT) which sells water mainly in California but has suffered due to the ongoing drought. A company less tied to the larger economy, it also provides a certain cushion against a possible market pullback.
But let's take a look at three smaller companies that may enjoy a renaissance thanks to the shift in water consciousness already occurring.
Consolidated Water Company
Consolidated Water (NASDAQ:CWCO) used to be a major force before the last recession. It sold nearly one billion gallons of fresh water at its peak year in 2007, when it had combined revenues of $54M and earnings of $11.4M. Unfortunately, the financial crisis took a toll on its bottom line, which has yet to recover.
That turnaround may be nigh, because revenues have already climbed back to their 2008 peak of just over $65M, but net earnings are still well below their pre-recession peak. That may change soon, for two reasons. First, the changing water consciousness as already mentioned, but in Consolidated Water's specific case, all debt has since been paid off and its balance sheet is now clean. This gives the company the financial room to develop its market and expand its business just at the right time.
To get an idea of the bargain here CWCO's share price is only one third of what it was the last time revenues were this high. If the company can find a way to lower its costs, which is primarily electricity for reverse osmosis, then shares can really climb in the coming years.
Layne Christenson Company
Layne Christenson (NASDAQ:LAYN) has had a rough time since 2008. This is a water drilling company providing engineering services to the public and private sectors for groundwater wells and aquifers. It was growing explosively leading up to the 2008 financial crisis, having grown its revenues by 200% from 2005 to 2009. During that time, its stock rose over 150%.
But since then, operating costs have gotten out of hand and Layne has ceased being profitable. What makes it attractive now is that it is finally engaging in the downsizing it has needed to do for years, and retrenching itself to focus on its core business. Earlier this week it announced the $43M sale of its geoconstruction business, cash which will hopefully be used to streamline its water segment and hopefully make it profitable once again.
Another potentially attractive feature of Layne for bottom pickers is that it is not too heavily reliant on any single customer. No single customer accounts for 10% or more of the company's revenues, which are still substantial at nearly $800M annual.
Company restructuring measures to date include workforce reductions, office consolidations, and the closing of unprofitable African locations. If it's enough to even make Layne marginally profitable in the coming quarter, it could be enough to propel shares substantially higher on a perceived turnaround for the company. Investors should watch for its next earnings release on September 9th for evidence of any positive changes.
STW Resources
Another small company making waves this week is STW Resources (OTCMKTS:STWS), which has had a slew of headlines this week concerning progress with its contracts in Texas. Texas has just gotten over an extraordinary drought situation much like California is suffering now, and local governments don't want to experience the associated problems again.
STW's wild card is its water purification technology, which the company touts to be the best on the market. Unlike standard reverse osmosis which leaves waste water brine that is environmentally damaging, STW's technology has zero liquid discharge and a 95-97% water reclamation ratio with very little electricity. Standard reverse osmosis typically recovers less than 50% fresh water and consumes a lot of energy. STW is currently engaged in buying up brackish water sources in Texas that are currently unusable in order to purify the water and sell it to Texan communities in need of supply.
The company has already announced joint venture commercialization plans and appears to be moving in the right direction. These initial projects, small scale now, will be the test case for its technology, the efficiency of which could help the company avoid the pitfalls of high costs of revenue in the future.
If the company's technology is as effective and efficient as they claim it is, investors will find out soon enough once these initial projects are up and running in the coming quarters. Together, this makes STW a potentially explosive, if speculative play.
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SOURCE: Market Exclusive
