PW Eagle is a manufacturing company. It makes and distributes PVC pipe and fittings used for potable water and sewage transmission, turf and agricultural irrigation, water wells, fiber optic lines, electronic and telephone lines and commercial and industrial plumbing.

In case you haven’t been following Sleuth or my colleague Chris Mayer recently, just about any business involved in water purification or fresh water transportation is not only crucial to our very existence, it is a business worth investing in.

According to Mayer…

“Half of ALL hospital beds in the world are occupied by someone suffering from a water-related illness. In the developing nations, 80% of all diseases stem from consumption of, and exposure to, unsafe water.

“Contaminated water is deadlier than any other evil on earth; deadlier than AIDS; deadlier than cancer; deadlier than contagious diseases; deadlier even than world wars. During the Second World War, one soldier died every eight seconds. Today, one human being dies every six seconds from drinking contaminated water.

“The scale of this ongoing international tragedy boggles the mind.

“More than a third of the earth’s population lacks access to effective sanitation, which is why more than a billion people contract water-related diseases every year…and why contaminated water kills more than 6,000 children every day.

“The U.N. estimates that in less than 25 years, if present water consumption trends continue, 5 billion people will be living in areas where it will be impossible — or nearly impossible — to meet basic water needs for sanitation, cooking and drinking. But present trends simply cannot continue. The human toll is already horrifying, and the economic toll is rising rapidly.”

Imagine living in an area where fresh water simply cannot be delivered. It’s almost impossible to think about. But it IS happening — and it is happening close to home.

Earlier this year, Dan Denning reported:

“In mid-December, the premiers of Quebec and Ontario, along with the governors of eight U.S. states, signed a pact that will ban all large-scale water diversions from the Great Lakes basin. That will prevent fully 20% of the total fresh surface water of the Earth being exported by pipeline to thirsty states like California, Arizona or Nevada. The eight states that border the Great Lakes — Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania and Wisconsin — have seen the future. And the future is that fresh surface water is going to be more and more valuable as it gets more and more scarce.”

There is literally a war for fresh water going on all over the world. And it’s happening right now.

PW Eagle is one of the few companies fighting to make sure potable water IS able to get where it needs to go. It is the No. 2 manufacturer of PVC pipe in the United States, with a 13% share of the entire market. It makes and sells over 5,000 PVC and PE fitting products to over 1,800 customers across the United States. And 39% of all its revenues stem from the waterworks sector (the rest comes from the irrigation, electric and energy sectors).

Making pipes isn’t super exciting. But there is, and will always be, a major need for them. The EPA estimates over $600 billion in waterworks spending will be necessary over the next 20 years. And that number may be very conservative. After all, the current infrastructure in the United States is old and not large enough to meet the needs of an expanding population.

As it stands right now, 15% of all treated water is lost due to leaking pipes. That equates to 2.5 trillion gallons of wasted water per year! This is an alarming stat — one that has the EPA convinced that 44% of all pipe networks will be classified as “poor,” “very poor” or “life elapsed” by 2020.

Even the American Society of Civil Engineers’ Report Card for America’s Infrastructure recently gave water and wastewater infrastructure a “D.” Folks, it doesn’t take a rocket scientist to figure out what is going to happen in the coming years and decades. PVC pipe manufacturers are going to get a lot of business.

PVC accounts for 84% of all total pounds of plastic potable water pipes and 50% of all of plastic drain and sewer pipes. Since the 1960s, PVC has become the material of choice in the U.S. water and sewer market. And PW Eagle is one of the major players in this space.

Over the last five years, PW Eagle’s sales have grown from $246.13 million to $694.24 million. That’s an annual compounded growth rate of 23%. And based on industry-wide projections, these sales figures will continue to grow into the future. Take a look at where the market is headed:

Not only is this a growth story, but PW Eagle is a company with improving fundamentals. The company’s financial statements reveal that:

• It has paid down $33.8 million in debt in the last four quarters
• It has generated cash from operations in four of the last five years. And it has been free cash flow positive (albeit slightly) in three of the last five years
• Sales rose 27% in the most recent quarter (Q2) versus the same quarter last year, and net income rose sevenfold.

In the company’s latest earnings release, Jerry Dukes, the company’s CEO, said:

“Our record second-quarter results reflect strong volume across all parts of our business. Low inventories across the industry and at the distributor level helped to bolster demand as the construction season came into full swing…The combination of strong volume and relatively high margins resulted in another quarter of excellent financial performance.”

High margins…low inventories…strong demand. Those are all good things for investors. They tend to lead to higher stock prices. And I’m not the only guy who thinks PW Eagle’s stock will continue to rise.

Pirate Capital, one of the most cutthroat hedge funds in the world, recently bought 21,000 shares of PWEI stock for $29.55 a share just two days ago. And since Aug. 16, Pirate has bought 230,600 shares at prices ranging from $28.94-34. That equates to over $7 million!

I tell you this for two reasons.

First, Pirate Capital has averaged a 28% compounded annual return since it was created in 2002. So it has a knack for investing in undervalued or struggling businesses, with the intent of throwing its weight around until it adds to shareholder value.

Second, Pirate obviously likes PWEI in the $30-34 range. Currently, the stock trades for $30.50.

With a market capitalization of just over $300 million, there is a lot of room for this tiny small-cap company to grow. Don’t be surprised if it goes a lot higher over the next three years. The water story is just beginning. You can still get in at the early stages.

Happy investing,

James
September 28, 3006

A Company With a Solution to a Problem Deadlier Than AIDS was originally featured in the Penny Sleuth.