Water Services Offers Improved Margins in Slow-Growth Environment

August 27, 2012

The water services industry offers investment opportunities after companies have lowered guidance this earnings season, coupled with a stock pullback due to pressure from slowing macroeconomic data points in the U.S. and Europe, says Hamzah Mazari, a Senior Analyst at Credit Suisse Group.

“The water side, it seems like a good investment right now because in a slow-growth environment what you are not going to get is cyclical pop. You want to be in companies that are diversified, that have high-margin aftermarket business as well as the other thing to point to is the balance sheets are in very good shape for the water companies,” Mazari said. “They are not very levered, they generate good cash, and so we also like that fact, especially in an environment that is slowing.”

Mazari recommends Pall Corporation (PLL) because he expects 300 to 400 basis points of margin improvement due to cutting costs and streamlining operations. He says despite Pall having European exposure, most of the European business is levered to the biopharma, health care, general industrial and energy, all of which he believes are strong.

“We also like that name because they are going to be sitting on a lot of cash, almost $1 billion of cash because they sold one of their businesses, and we think that they should be returning that cash back to shareowners particularly because we don’t think there is any large acquisitions,” Mazari said. “And also, they’ve got a balance sheet that’s pretty underlevered, so it’s not like they have to pay down any debt either.”