by Travis Johnson, Stock Gumshoe | May 24, 2007 5:57 pm
This is the second stock that was profiled in a teaser ad for Bill Mann’s Motley Fool Global Gains newsletter — the second of three that were profiled as Three Small Caps that will Dominate the International Market.
The first, as you may remember, was an alternative energy play from South Africa named Sasol.
Hidden Advantage Stock #2 is in an entirely different industry: Water.
The Fool calls this “A perfect, nonvolatile, fortune-maker”
And the leadup to this one is long and enticing, as usual: Zero beta, huge compound growth, guaranteed growth of their market, and …
“the largest market for any product on the planet?”
with “no way for recession, inflation, rising or falling interest rates, or just fickle trends of taste and fashion to impact sales of this company’s product?”
Those two are the teasers that tell us it’s a water investment, of course — and I think we’ve all seen enough water investment teasers recently to tell us that this is a hot topic, if not an investing mania just yet. There are water ETFs, water rights owners, pump and equipment makers, water utilities — all kinds of investments in this sector.
And I’ll spare you the several pages of water puffery — about the number of diseases that are caused by unclean water, the pollution problem, and the problem of crumbling water infrastructure in the developed world and nonexistent infrastructure in the developing world. And the simple lack of enough fresh water in the right places. OK, so we know all that stuff, on to the actual investment idea.
We get a few clues:
“The company is required to dole out 25% of those annual revenues every year to you, the shareholder?”
The President of the InterAmerican Development Bank, in a recent speech at the NYSE, called this company “an efficient, decentralized, results-oriented enterprise.”
“As of June 30, 2006, the company delivered water to almost 26 million people and offered sewage services to about 17 million people…”
Sales of $2 billion lsat year, and first half sales of $1.4 billion this year.
Shares are at $33, which gives them a forward PE of 9.
So … do you want to take a subscription to the Global Gains service, and get the report, “The 21st Century’s Most Precious Natural Resource?”
No? OK, hold on a sec.
I’ve just spoken to my editor, and he told me I can give you a better deal: If you’ll just read a few more sentences, I can provide the name of this investment AT ABSOLUTELY NO COST TO YOU. That’s right, free.
I just need a few more seconds to turn up the voltage on the Brain-o-lizer … there we go.
This “water stock to own if you’re only buying one” is …
Companhia de Saneamento Basico do Estado de Sao Paulo, thankfully referred to as SABESP, traded on the NYSE as an ADR with the ticker SBS.
This is essentially a big municipal water utility in Brazil. It’s no longer trading at $33, since this email is getting a little long in the tooth (though it’s still being sent out). The speech by the IADB fella where he talked about SABESP and issued the quote above is available here if you’re interested, but it was back in October. The 25% payout requirement is also a clue that we’re dealing with a Brazilian company.
So … what do we think about this one? Frankly, not a bad pick on a cursory glance. It’s not necessarily cheap — the PE is about 9 still, even at a higher share price of $39 or so, but it’s not exactly one that we should expect to grow in any explosive way. The yield is decent, going from the past two semiannual payouts you might expect a bit over a buck a share in divvies, so that’s something a hair under 3%. Not particularly high for a utility, or for a Brazilian company … but the yield also may have the potential to grow somewhat as the years pass. Sales are projected to grow at about 9% this year.
The PE of 9 is certainly much lower than similar U.S. companies like Aqua America, and growth is probably stronger than the smaller, stodgier water utilities that might have somewhat higher yields in the US (the highest yielding US water companies appear to top off at yields just above 4%, and they probably have very little growth potential).
What’s good? Well, it is in a massively populous area and it has managed to serve up clean water to some of the poorest people in the world at a profit, and still get credit for doing so efficiently and in the public interest.
I have no idea how regulated this company is, or what their future looks like — other than that analysts believe this past year was unusually good, and next year is unlikely to show any earnings growth. I would guess that, discounting for the volatility inherent in Brazilian investing, this is probably a pretty stable investment. But I could be really big letters WRONG on that.
So … I know lots of folks are interested in water investing, and in BRIC investing. I prefer growth companies and consumer companies in Brazil, personally (I hold Sadia and Gol), and in water I’d probably go with PICO (remember, we sleuthed out that one as the “company that’s turning water into profits“) before I went with SABESP … but that’s just me. If you’ve got an argument for or against SABESP, I’d love to hear it.
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