Tuesday, November 15, 2011

Water Spin Off

Unlike the questionable valuation of the initial public offering of Groupon, Inc. (GRPN:  Nasdaq), the market has been eager to trade stock supported by a consistently profitable operation.  One grounded  -  no pun intended  -  by a highly coveted natural resource and proven product line.  Last month ITT Corporation (ITT:  NYSE) spun out its water resources solutions subsidiary Xylem, Inc. (XYL:  NYSE).

Granted XYL shares have not been impervious to the sell-off in U.S. equity markets experienced in the first two weeks of November 2011.  Yet the stock price remains within waving distance to the opening price of $25.35.  The implied value is 13.8 times net income of $338 million in the trailing twelve months.

Xylem has built up considerable expertise in fluid technology and offers solutions for water management to utilities and other water resource owners.  On the flip side Xylem can be your best neighbor it you have a lot of water in a place where water does not belong.  Its solutions include potable water and waste water treatment solutions.  The Company offers a line of pumps and accessories as well as analytical instruments and controllers.

Xylem did not have the benefit of the usual high profile IPO road show process.  An S-8 was unceremoniously filed with the SEC on October 28, 2011.  So CEO Gretchen McLain has been making the rounds on Wall Street gathering friends and generally getting the message out about the potential in the water industry.  It does not take much persuasion to alert investors to the opportunities for companies with proven products that clean-up and conserve water resources.  She has been well received.

Xylem is now included in the Crystal Equity Research alternative energy index The Mothers of Invention in the Efficiency Group.  While no stock looks compelling in the present highly volatile market, Xylem is an interesting play on the water sector.  The relatively scarcity of water in certain areas is likely to drive value among water-related companies for many decades to come.  It makes sense to find take long positions when market corrections deliver value pricing.   

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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