Water, the Blue Gold?

Supply shortage of drinking water in Asia, Middle East, and Africa is nothing new. In the continental Europe, demand for water in industrial and commercial use has been a concern for not only the environmentalists but state government and businesses (including farming). Droughts and water conservation have become a top priority for many EU members in recent years.

Water is also an essential part of economic growth for developing countries such as India and China. The reason is simple: almost all basic material and manufacturing planets need clean water to operate. The depletion of water level is definitely solicitude for these regions.

As a result, interest in waster investment is fervid among institutional players. The launch of water ETFs, such as Claymore’s S&P Global Water Index (AMEX: CGW) is a good example of how Wall Street is eyeing for the next gold rush.

Two leading water treatment and purification candidates should be considered when making a long term water play: Veolia Environnement SA (NYSE & PARIS: VE) and Suez (NYSE & PARIS: SZE).

These two French multi-nationals have invested substantially in water infrastructure around the globe. Veolia is currently the world’s largest water supplier. Suez, on the other hand, is one of the largest environmental and utility companies in the world. Veolia’s recent win in Australia and Suez’s China expansion are just two of many examples of their global dominance in securing water deals for drinking and industrial use.

Suez is currently trading around 14 times 2008 earning estimate – lower than most its competitors in US and other countries. Veolia is trading at around 28 times the estimated 2008 earning – a premium resulted from a recent bullish outlook in this sector. Both companies also provide healthy dividends: Veolia has a yield of 3.2% while Suez provides 2.5%.

I’m not claiming that water is the next oil, copper or uranium. However, the prospect of long-term demand and an increase in public infrastructure investment from countries around the world put water in a unique situation. If you happen to live in Canada or US, try to buy a bottle of water at a gas station. You will likely find that a liter of bottle water costs more than a liter of gas.

Companies that take advantages of such global trends should perform well for value investors. Both Veolia and Suez fit into this category.