Water is cheap – I pay less than $0.003/gallon to my water utility, but water stocks are another story. If you want to own a good water infrastructure company, be prepared to pay at least $17 for every dollar of EBITDA, and in some cases quite a bit more. I’d like to say that these premium valuations are justified by the underlying fundamentals, but I still don’t see it – I like the leverage to increased efficiency and digitalization, and I understand the growing power of ESG investment mandates, but it still seems excessive.
Given what’s happening in the space, I’m not that surprised that Watts Water Technologies (WTS) is up another 40% in just the four months since my last update on the company. Water infrastructure companies are reporting torrid demand and strong operating leverage, and again, this is a popular place to play. While I do think Watts is more reasonably priced than many stocks, and I think the probability of additional beat-and-raise quarters is higher here than for many sectors, I can’t make sense of the valuation beyond investors wanting to pile into a hot space.
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