Investing in Water V


This site’s focus on investing in water is increasing because a key to profitable investing is spotting contrasts, distortions and trends. 

lake shot

This lake in our Florida back yard has dropped two or three feet in the last year.

Pure water is an essential for life.  The contrast is that the supply is falling… the demand growing.  That’s a given.  The trend is that share prices in companies that purify water have been falling.  This creates a distortion that creates value.

Investing in well managed water purification companies cannot lose long term.  How long is long term though?  The question is… What does the value look like now?

Also keep the words WELL MANAGED in mind.  Water companies benefit from the common set of long term tailwinds of increasing water supply-demand imbalances, massive infrastructure rehabilitation needs, new infrastructure requirements due to population growth and urbanisation, and increasing regulatory influences.

Water companies provide the operations, equipment, chemicals, and services that make water available for municipal, industrial, and agricultural markets.

Not all water companies are good stocks for investment.  The best performing 10% of global water stocks generally outperform the worse performing 10% by about 35 percentage points on any given month.

Not all good water stocks are ones to invest in right now.

The question is…. Is this the time to re-enter those investments?  If so which stocks are well managed?  Which water stocks are most likely selling at a good value and which are most likely to see a price rise.

Our search is for answers to these questions.

To begin this series we reviewed the valuations and prospects of three water shares we held in our green portfolio.  We recommended the portfolio in 2006. It rose 266% in a year and in late 2007… we urged readers to get out.  Good thing too as it fell nearly 200% in 2008!

Kurita Water Industries 

Kurita Water Industries Ltd., according to Bloomberg’s Business news is: a water and environmental management company, provides water treatment solutions in Asia. The company operates in two segments, Water Treatment Chemicals and Water Treatment Facilities. The Water Treatment Chemicals segment offers boiler water treatment chemicals, cooling water treatment chemicals, wastewater treatment chemicals, process treatment chemicals, incinerator chemicals, equipment and systems for water treatment chemicals, and packaged water treatment management contracts. The Water Treatment Facilities segment provides ultrapure and pure water production, wastewater reclamation, and wastewater treatment systems; and electrolyzed sulfuric acid generators, as well as engages in the ultrapure water supply business. This segment also offers tool cleaning, maintenance, soil remediation, and chemical cleaning services. It serves pulp and paper, steel, food and beverages, oil refining and petrochemicals, pharmaceuticals, LCDs, semiconductors, and electronic components industries, as well as regional heating/cooling centers. The company was founded in 1949 and is headquartered in Tokyo, Japan.

The headline at Kurita’s website is appropriately Zen for a Japanese company and says:  Study the properties of water, master them, and we will create an environment in which nature and man are in harmony.

That is a pretty good statement but does this make the shares a good investment now?

If this is a true reflection of the company’s mission then… long term… this is good.  Our goal though is to choose an appropriate entry time so that we do not have to wait too long for the share price to rise.  The share chart below shows that had we entered in the last five years… and if we had to sell… oops!

bloomberg kurita water share chart

(Click on photos to enlarge)

The Kurita share price in US dollars has fallen 14.97% over the past five years.

bloomberg kurita water share chart

The shares were hit even harder in the last year dropping over 20%.

How do the Kurita shares look now?  The big picture is strong… the world needs pure water.

Second, Japan is a good value market… so this is another positive value force.  You can see Keppler’s Major Market Valuations here.

keppler-analysis

Kurita shares look like they are nicely valued within the environmental sector as well,  currently selling in the 14 P/E range is below the industry average of 15.7.   The price to book ratio of just 1.09 is well below the sector average of 1.7.

Dividends at  2.33% and five year dividend growth at 6.45% are also both attractive in this market and sector.

Earnings are rising. The company had $93,552  million earnings and net income of $8,936 million March 2010 to March 2011. This rose to earnings of 104,277  million and  net income of 8,667 million  March 2011 to March 2012.

This is an upwards force on share prices.

Looking at the downside margins they were down in 2011 into 2012.

bloomberg kurita water share chart

This trend could worry analysts and keep prices lower or reflect a management or business problem.

Let’s review Kurita shares on the three important points about share investing.

#1: Cheap stocks outperform expensive stocks.  Yes, Kurita shares appear to be selling at a cheap price.

#2: Stocks in companies with rising earnings outperform stocks in companies with falling earnings.  Yes, the earnings are rising but income is down.

#3: Stocks with rising share price, attention in the market and high and rising earnings outperform stocks with low and falling earnings.  Kurita does not have a rising share price nor attention in the market.

In other words, look for high quality companies with share prices already in established up trends that are cheap (price earnings), with high and rising earnings and increasing attention from the market.

Kurita falls short for now in this context.

In thinking about your overall global portfolio balance keep in mind that Kurita represents  an investment in Asia and the Japanese yen.  Kurita is a Japanese company so ultimately its shares are affected by the yen.  However as a global business its earnings will come in many currencies which offset the Japanese aspect.

In the last year in yen the shares have a one year loss of -14.23%.  In US dollars the 1 year loss is -20.35%. In Euro the loss is -14.64%.

Regarding its Asian presence Kurita has a large and growing position in China also.  In June 2012, Kurita increased its investment in Kurita Water Industries (Suzhou) Ltd., a subsidiary in China.  This subsidiary engages in the manufacture, sales, operation, and maintenance of Chinese water treatment facilities.

Thus we have to remain focused on the Japanese/Chinese dispute over the uninhabited Senkaku (Japanese name) – Diaoyu (Chinese name) islands.

CBS News reported two days ago:  Chinese ships entered waters near a group of disputed islands for the first time in three weeks Thursday, prompting a strong protest from Japan, which says China’s air force has also sharply increased its operations in the area.

Japan’s Coast Guard said the four Chinese surveillance ships were spotted within a 22-kilometer (12-nautical mile) zone that Tokyo considers its territorial waters near one of the disputed islands in the East China Sea early Thursday morning.

The ships refused to leave, saying the area was Chinese territory, according to Atsushi Takahashi, a spokesman for the Coast Guard’s headquarters in Okinawa, which has jurisdiction over the islands. He said it was the first time Chinese ships had entered the territorial waters since Oct. 3.

Japan’s Foreign Ministry lodged a strong protest with China’s ambassador in Tokyo.

Kurita Water Industries appear to be a well managed company in a sector that supplies an ultra necessary commodity that has a limited supply and growing demand.   The shares are listed in a good value market and selling at extremely good value during this darkest hour when shares globally are depressed.  Troubled margins, potential military disputes and lack of attention on the shares in the market place mean that these are probably shares to put on your watch list rather than rush into now.

Kurita is traded in yen as the symbol 6370 on the Tokyo Stock Exchange.

Kurita is traded in US dollars as the symbol KTWIF:OTC in the US.

Kurita is traded in euro as the symbol KWI on the Frankfurt Stock Exchange.

Go to the final chapter in the “Investing in Water” Report – Click here.

Gary

Go to the final chapter in the “Investing in Water” Report – Click here.

See Kurota’s updated share chart on the US OTC market in US dollars

You can study Kurita’s website here


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