Investing in Sustainable Solutions: 2 Top Water Tech Stocks

December 27, 2024 at 07:00 AM EST

Irrigation machine watering the growing crop, on a clear day with some clouds in the sky. — Photo

Water is the lifeblood of our planet, and it is increasingly under pressure. Growing populations, expanding industrial activities, and the looming effects of climate change are converging to create a global water scarcity crisis. This growing challenge has placed a spotlight on the critical role of water technology in ensuring sustainable water management for the future.

For investors, this presents a compelling opportunity. This fledgling sector offers a chance to invest in companies at the forefront of innovation, poised to address a fundamental global need, and positioned for substantial growth.

A 1974 Law Still Drives Innovation Today

The Safe Drinking Water Act (SDWA) was signed into law in the United States on December 16, 1974. This landmark legislation was a direct response to concern about the safety and quality of drinking water across the nation. Prior to 1974, widespread contamination and inadequate water treatment practices posed significant public health risks.

The implications of the SDWA extended far beyond regulatory oversight. By establishing a clear framework for water quality, the act catalyzed a wave of innovation in the water treatment industry. Companies were driven to develop and deploy advanced technologies to meet the increasingly stringent standards.

The SDWA's impact continues to be felt today, as it underpins ongoing efforts to modernize water infrastructure, promote water conservation, and ensure access to safe, clean water for all. It created a market sector where companies dedicated to water technologies could thrive by providing solutions that meet these regulatory requirements and address the broader challenges of water management.

Xylem Inc.: A Global Leader in Water Technology

Xylem Inc. (NYSE: XYL) has solidified its position as a global leader in water technology. Operating in over 150 countries, Xylem offers a comprehensive suite of solutions that address the entire water cycle. Headquartered in Washington, D.C., Xylem serves a diverse clientele that includes public utilities and municipalities as well as residential, commercial, agricultural, and industrial users.

Xylem's operations are organized into four segments: Water Infrastructure, Applied Water, Measurement & Control Solutions, and Integrated Solutions and Services. The Water Infrastructure segment provides technologies for water and wastewater transport and treatment, including well-known brands like Flygt and Godwin. The Applied Water segment offers solutions for efficient water use in various settings, featuring brands such as Goulds Water Technology and Bell & Gossett. The Measurement & Control Solutions segment delivers advanced metering, network technologies, and analytics through brands like Sensus and Xylem Vue, enabling more intelligent water management. At the same time, the Integrated Solutions and Services segment provides maintenance and digital solutions to a wide array of water management problems.

Xylem's earnings results for the third quarter of fiscal year 2024 (Q3 FY2024) reflected steady progress. The company reported revenue of $2.1 billion, a 1% year-over-year increase, and order growth of 8%. Full-year revenue guidance was updated to approximately $8.5 billion, indicating a 15% increase from the previous year. Xylem's adjusted earnings per share (EPS) guidance for the full year was narrowed to 4.22 − 4.24.

Xylem's strategic acquisition of Idrica, a specialist in water data management and analytics, underscores the company's commitment to digital innovation. This move is expected to enhance the Xylem Vue platform, providing utilities with powerful tools for real-time network monitoring, operational optimization, and proactive problem-solving. Xylem has projected earnings growth of 11.11% for 2025.

Valmont Industries Inc.: Infrastructure and Agricultural Solutions

Valmont Industries Inc. (NYSE: VMI) is a global leader in providing infrastructure and advancing agricultural productivity. Valmont's operations play a critical role in water management, mainly through its industry-leading irrigation systems and infrastructure solutions that support water utilities.

Valmont operates primarily through two business segments: Infrastructure and Agriculture. The Infrastructure segment accounted for 74.1% of net sales in Valmont’s earnings report for the third quarter of fiscal year 2024 (Q3 FY2024). This segment provides a wide range of products and services, including utility support structures, lighting and transportation solutions, telecommunications infrastructure, coatings services, and renewable energy solutions. The Agriculture segment, representing 25.9% of Q3 FY2024 net sales, focuses on mechanized irrigation equipment and associated technology solutions under the Valley brand. Valmont's center pivot and linear irrigation systems are crucial for efficient water use in agriculture, a sector facing increasing pressure to conserve water resources.

Valmont's third-quarter results for 2024 demonstrated resilience. Despite a 2.9% year-over-year decrease in net sales, which totaled $1.0 billion for the quarter, the company achieved solid operating margins and generated strong operating cash flows.

Operating income for the quarter was 125.7 million, or a 12.3% increase over the same period in 2023. Adjusted operating income was $120.8 million (11.5% of net sales). The company reported diluted earnings per share (EPS) of 4.11, compared to a diluted loss per share of $2.34 in Q3 2023. Adjusted diluted EPS was $4.12.

Weighing the Investment Potential: Opportunities and Risks

The water technology sector presents a compelling long-term growth story. Increasing global water scarcity, driven by population growth, urbanization, and climate change, is creating unprecedented demand for innovative solutions. Aging infrastructure in developed nations and the need for new infrastructure in emerging markets further contribute to this demand. Xylem and Valmont are well-positioned to capitalize on these trends.

Xylem's comprehensive portfolio of water technologies, global reach, and focus on digital solutions provide a strong foundation for growth. The acquisition of Idrica and partnerships with utilities like the Immokalee Water & Sewer District demonstrate Xylem's commitment to innovation and ability to address evolving market needs.

Valmont's leadership in irrigation systems, coupled with its infrastructure solutions that support water utilities, positions it to benefit from increasing investments in agriculture and water infrastructure. The company's strong cash flow generation and focus on operational excellence further bolster its investment appeal. Valmont projects an earnings growth of 6.11% next year, and Xylem projects an 11.11% growth in earnings next year.

However, investors must also consider the risks. Xylem's stock has experienced some recent headwinds, including a "Peer Perform" rating from Wolfe Research, although other firms maintain more bullish outlooks. Valmont has seen recent insider selling, which could raise concerns. However, it is essential to note that insider selling can occur for various reasons and may not necessarily reflect a negative outlook. Both companies face risks related to global economic conditions, commodity price fluctuations, and potential regulatory changes.

A Promising Future

The water technology sector is poised for continued growth and evolution. As the world grapples with the challenges of water scarcity and the need for sustainable water management, companies like Xylem and Valmont, which provide innovative and efficient solutions, are positioned to thrive.

These companies offer investors an opportunity to participate in a financially promising sector that is crucial to addressing a fundamental global challenge. While risks exist, the long-term outlook for water technology remains bright. Investors should conduct thorough due diligence, considering their individual investment goals and risk tolerance, and stay informed about industry trends and company-specific developments. The ongoing need for innovative water solutions will likely continue to drive growth and create value in this critical sector for years to come.

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