"For those in search of a pure play in the water infrastructure sector, my favorite bet is Insituform (NSDQ: INSU)," says Roger Conrad in his newly-launched advisory service, The New World.
Conrad explains, "Its most innovative product is its fast-growing 'trenchless' repair service to aging and cracked pipes." Here's his review.
"Rather than dig up and replace actual pipes, the process involves injecting a compound into the pipe itself which acts to seal any breaches. The result is a lower cost and far less intrusive repair.
"Insituform has languished in recent years, as overly aggressive expansion by prior management ran up against a brick wall of stagnant to falling system investment by municipalities.
"As a result, despite the success of trenchless repair, the overall business sagged and the share price fell sharply over the past few years.
"Starting this year, however, management's turnaround efforts have begun to bear fruit. Third quarter profits rose 66% from last year's levels on a 10% revenue boost.
"The company's conventional sewer rehabilitation operations showed their first signs of life in several years. In the US, it won a $10.33 million deal with Connecticut Water Service.
"The company also reported making great strides in Europe and announced a promising joint venture in India, a country with water infrastructure needs that are multiple that of America's.
"As is the case with any engineering company, contract backlog or prospective revenue from orders yet to be filled is a key barometer of Insituform's future health.
"As of the end of the third quarter, that stood at $292.9 million, well above the $259.0 million recorded at the beginning of 2008 and a year earlier level of $224.6 million. That's impressive growth, considering the fact that overall industry spending was flat, and it should accelerate going forward.
"Backlog has grown most impressively in Asia, with the company posting a roughly 60% sequential surge in the third quarter from second quarter levels.
"That may slow in the coming months, a global growth weakens. But given the immense needs of that increasingly supply strained region, it promises to be a major profit center in coming years.
"The company has also been on the move in Canada, winning a $4.4 million contract to rehabilitate 14,750 miles of water lines in the city of Victoria. That could be the precursor to a lot more business as well, as Canada too ramps up its infrastructure spending to shake off economic weakness.
"Insituform's success hasn't gone completely unnoticed by the market, as the shares have recently rallied. The stock, however, still trades at less than 1.5 times book value and one times annual sales, despite a projected long-run profit growth rate of 17.5%.
"That's solid value, considering the lion's share of revenue is derived from governments and regulated utilities, some of the most reliable payers around."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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