Finding Value And Consistency In Consolidated Water Co.
By Nicholas Quigley, Professional analyst, long/short equity, value From Seeking Alpha
Consolidated Water Co. Ltd. (CWCO) is a tiny company, with a market cap of only $172mm. As of its latest quarterly report ending Q3 2013, Consolidated Water was trading at 0.8x the value of net working capital. Over the past few years, CWCO has traded well under book value, but remains a small, relatively undiscovered stock. For those looking to diversify into a teeny utility company, Consolidated Water is certainly worth a look.
The stock is much more volatile than most utilities. Consolidated Water’s high beta of 1.5 is surprising, but not necessarily a deterrent. The high beta may be attributed to the small size of the company, enabling any investor with substantial buying power to push the stock up or down. The stock prices of significantly larger utility companies like American Water Works (AWK) and California Water Service Group (CWT) fluctuate much less, with lower betas of 0.29 and 0.42, respectively.
Other fundamentals that provide key insights are the P/E around 15 and the percentage of institutional ownership at 49%. As with other companies in the water supply sector, Consolidated Water’s P/E is rather consistent when averaged over the past three years. The institutional ownership is high for a company with such a small market cap, but still under 50%, which is what long-term investors like to see. Companies with >50% institutional ownership may be “over-owned.
Consolidated Water has three main business segments. Its Retail Water Operations segment supplies water to government, commercial, and residential customers, and its Bulk Water Operations segment supplies water to government-owned distributors. Consolidated Water also operates a Services Operations division that provides water engineering and management services to clients.
Since 2010, Consolidated Water has grown the most in its Bulk Water segment. That growth is promising because of the necessity of clean drinking water, creating an expectation of governments to provide it as a basic need. However, out of the three government customers, only the Cayman Islands, with a stable outlook and high credit rating, should be considered low-risk. The credit rating of the government of the Bahamas was downgraded in 2012, and currently has a negative outlook. Belize was upgraded in 2013, but remains the most risky of the bunch. Revenue from Bulk Water Operations in the Cayman Islands, the Bahamas, and Belize made up 62% of Consolidated Water’s total revenues in 2012.
Consolidated Water Co. Ltd. has an exclusive license in the Cayman Islands to supply water to retail customers. Such a license removes the possibility of competition in the Cayman Islands and should help attract even the most conservative investors. The license will keep cash flowing as Consolidated Water continues to grow its Retail Water Operations in other regions. An exclusivity license is a very promising sign of reliable future revenues for the company and consistent dividends for investors.
Consolidated Water operates 14 reverse osmosis desalination plants in the Caribbean. Eight of these plants are located in the Cayman Islands, providing Consolidated Water with reliable revenues consistent with that from any utility operation located in a country with a very high credit rating. The reverse osmosis method of desalination that Consolidated Water uses is one of the most energy-efficient technologies available to desalinate water in widespread use today.
The CEO, Mr. Frederick W. McTaggart, has served at a director-level position or above since 1998, when the company’s consistent quarterly dividend record began. His annual compensation is below $1mm per year including stock options, which is refreshingly lower than the overcompensated CEOs running larger utility companies. Consolidated Water’s other officers and executives are compensated well under Mr. McTaggart’s pay. Due to the moderate executive compensation, a consistent earnings record, and a long history of dividends, we can conclude that Consolidated Water is managed sufficiently enough to meet the requirements of a good investment. According to the latest annual report, management’s strategy is to continue to expand water operations into tourist-heavy areas where water supply operations will be most profitable.
Purchasing Consolidated Water Co. Ltd. may very well be a cheap way to own a desirable business. The company utilizes energy-efficient desalination technology in its plants, and provides clean drinking water to island countries that need it most. Admittedly, I am not a water engineer, but management’s strategy appears conservative enough to continue the strong dividend and earnings record for years to come. The company’s assets are spread moderately between high-risk and low-risk customers, balanced adequately for potential growth. I expect Consolidated Water to publish its 2013 annual report in mid-March, the same time as it has released annual reports in the past. I am bullish toward Consolidated Water, but will wait until the next earnings report before making any trades.
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