If you’re interested in investing in water tech stocks, you’d be wise to turn to Invesco. It’s cornered the market on water technology companies, marketing three of the top water exchange-traded funds (ETFs) listed on U.S. stock exchanges: Invesco Water Resources ETF (NASDAQ:PHO), Invesco S&P Global Water Index ETF (NYSEARCA:CGW) and Invesco Global Water ETF (NASDAQ:PIO).
According to an Invesco white paper, global water resources fell by 56% between 1962 and 2014. Water scarcity solutions have become one of the world’s biggest priorities. The World Economic Forum estimates that $26.4 trillion will have to be spent on water infrastructure between now and 2030.
Investing in the water sector makes sense for those who feel the world can be pulled back from the brink. With that in mind, I’ve selected three water tech stocks from the top 10 holdings of the previously mentioned ETFs.
| ROP | Roper Technologies | $452.98 |
| WTRG | Essential Utilities | $42.85 |
| DHR | Danaher | $231.47 |
Roper Technologies (ROP)
Roper Technologies (NYSE:ROP) is the second-largest holding of PHO with an 8.3% weighting. The diversified technology company makes water meters, among myriad other technology-enabled products and software.
Its Neptune water meters enable utilities (like the next name on this list) to remotely monitor customers’ water usage. Like many of Roper’s businesses, it acquired Neptune, paying around $482 million for the company in October 2003.
Neptune’s data collection systems are used to read more than 72 million meters per month. “Because water meters are a utility’s cash registers, the solution begins with measurement integrity at each water meter,” the company’s website states.
Roper just delivered another earnings beat when it reported first-quarter results today. The company earned $3.90 per share versus the $3.85 per share analysts were expecting. Revenue also exceeded estimates, up nearly 15% year over year to $1.47 billion. That is in line with its three-year compound annual growth (CAGR). Adjusted EBITDA, meanwhile, has grown at a compound annual rate of 18% over the past three years.
While shares are down about 9% over the past year, they have rallied 27% since bottoming out in mid-October. Twelve of the 19 analysts covering the stock rate it “overweight” or “buy,” with an average target price of $503.13. That implies upside of 11% from where shares currently trade.
Roper is a solid, diversified company and a great way to dip your toe into investing in the water sector.
Essential Utilities (WTRG)
Essential Utilities (NYSE:WTRG) is the third-largest holding of CGW with a 5.9% weighting.
When I first saw Essential Utilities in the fund’s top 10 holdings, I scratched my head, trying to recall how I knew this water utility. Once upon a time, it went by the name Aqua America. However, it changed its name to Essential Utilities in early 2020 after acquiring Pittsburgh-based natural gas distribution company Peoples Gas for an estimated $4.3 billion.
I wrote about Aqua America in August 2019 as one of 10 mid-cap dividend stocks to buy. My rationale for recommending the stock was that Peoples Gas gave the company another avenue for growth.
In 2022, Essential Utilities grew operating revenue by 21.8% to $2.29 billion, while earnings per share of $1.77 were 6% higher than in 2021. Management expects to invest $1.1 billion a year through 2025 on infrastructure so it can continue to grow. And analysts are calling for revenue and earnings growth of 10.8% and 13.2%, respectively, this year.
In addition to healthy financial results, WTRG yields 2.7%, making it an excellent, low-risk dividend stock.
Danaher (DHR)
Danaher (NYSE:DHR) is the second-largest holding of PIO with a 7.6% weighting. The diversified company makes products in the environmental, life sciences and diagnostics fields. In September, Danaher announced that it plans to spin off its Danaher Water Quality Platform into a separate company, along with its product identification business, by the end of the year.
Chief Executive Officer (CEO) Rainer Blair said the new company “will be advantaged as a standalone company with greater opportunities to pursue high-impact organic and inorganic investments.”
And as GuruFocus’ Margaret Moran notes: “Danaher’s spinoff looks especially promising because it will become one of the few names on the market that is primarily focused on water quality and water management solutions in a world where water shortages are expected to become commonplace over the next couple of decades.”
The stock has underperformed recently, down 13% year to date. This includes a nearly 9% single-day drop following the release of the company’s first-quarter results on April. 25. While it beat on the top and bottom lines, reporting adjusted earnings of $2.36 per share on revenue of $7.2 billion, management lowered its outlook for the full year.
“We had a good start to the year in the first quarter,” Blair said. “Our team’s focused execution in a challenging operating environment helped deliver better-than-expected revenue, earnings and cash flow. We are especially pleased with the performance of our base business, which grew 6.0% in the first quarter.”
Analysts weren’t as pleased. Bank of America downgraded DHR stock to “neutral” from “buy” on the news.
Yet, from where I sit, Danaher is a beast of a company that has outperformed over the long term. It, like Roper, has its hands in a lot of pies. With trailing 12-month free cash flow of $7.32 billion, it has a free cash flow yield of 4.3%, which makes its stock fair value in my book. And the upcoming spinoff could unlock additional shareholder value.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.