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Who’s Benefiting From the Drought?

Wednesday, 15 Aug 2012 | 1:29 PM ET

While wreaking havoc on grain crops, the worst U.S. drought in a half century is providing opportunities for companies that provide and pump the most precious of commodities — water.

Jeremy Tilton fills a water tank for cattle in a pasture August 3, 2012 near Cuba, Illinois.
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Jeremy Tilton fills a water tank for cattle in a pasture August 3, 2012 near Cuba, Illinois.

While the drought is testing farmers and food producers, the volatility in weather patterns is giving water companies new revenue sources, as they provide solutions to the environmental challenges.

Water utility companies American Water Works and Aqua America are among those benefitting, according to Timothy Winter, utility industry analyst for GAMCO Investors. Winter said the two water utilities’ sales to residents in drought stricken areas for sprinkler systems and to fill pools is increasing pumpage, while wholesale sales to larger customers or municipalities are also improving. (Related Link: Ag. Secretary: We Promise to Help Drought-Stricken.)

The bump in sales should continue, provided that customers are not subject to drought restrictions and that the utility companies’ supplies remain adequate.

Drought 2012: Water Stock Winners
CNBC's Jackie DeAngelis reports on how this year's drought has impacted water companies across the nation.

“Both water utility companies had strong quarters, particularly AWK, who raised guidance by $0.20-0.25 per share and we expect a strong third quarter as well,” noted Winter who rates both companies ‘buy.’

“About 70 percent of the increase in our guidance was driven by weather-related impacts,” American Water President Jeff Sterba told CNBC.

Analysts say investor interest increases for water companies during periods of drought. Since mid-June, for instance, American Water shares have increased from just under $33 a share to a current level above $38. (Related Link: Marijuana, the Drought-Tolerant Plant.)

“People take water and its value for granted when there plenty of it. However, its value becomes infinite when supplies are low. AWK and WTR as larger and more regional utilities benefit when the public supports and encourages investment in water and wastewater infrastructure,” said Winter.

Investment in water infrastructure maintenance and build out can be costly though, and if the drought continues utilities could see their systems, and supplies, stretched.

“AWK has already seen a significant increase in demand from droughts, even into July. The sudden increase in demand, however, could strain their already taxed water infrastructure system. You could end up seeing an increase in capital expenditure going forward for repairs given the increased burden on their aging pipe infrastructure,” said Garik Shimois, senior research analyst at Longbow Research.

American Water’s Sterba said his company is faring well so far. “What we're focused on is helping making sure that our systems are healthy, maintain as much reservoir capacity as we can. Frankly we're in pretty good shape as of today with our reservoir levels as we expect them to be,” he said.

Sterba said American Water has increased its capital expenditures. “We will spend about a $100 million more this year than last year. For the long-term we see $800 to a billion dollars each year. In the? reality we could be at $1.5 billion, but we have to be careful about the impact on rates,” said Sterba.

Flow control equipment, and desalination devices are also part of the discussion.

In addition to the water utilities, companies that make filtration systems, flow control equipment, and desalination devices are being talked about.

Pall Corp , Northwest Pipe, and Flowserve are some of the names being discussed in utility circles, but at this point it appears the revenue impact has been minimal.

“I can’t see Pall Benefiting materially … Northwest Pipe would only benefit if new water transmission lines were run in anticipation of ongoing drought conditions as a way to avoid shortages … same goes for Flowserve," said Michael Gaugler an analyst at Brean Murray, Carret & Co. Flowserve shares have risen from a low of $100 in early June to around $128 Wednesday.

Gaugler also said other companies to watch include Layne Christensen, a well driller and construction company; Tetra Tech — which does environmental impact studies, permitting and design for longer term infrastructure projects, and Watts Water Technologies involved in water reuse and drainage.

But he said the biggest beneficiaries so far may be Lindsay Manufacturing, a manufacturer of agricultural irrigation equipment. Companies that produce irrigation systems are of particular significance, as the impact of having such systems in place is already measurable.

“Those farmers that had irrigation in place this season are faring much better than their non-irrigated neighbors. One example — a Tennessee farm contact is harvesting center pivot irrigated corn at 225 bushels per acre. (Related Link: Can Drought-Tolerant Seeds Save the Crop?)

Non-irrigated fields nearby are getting 100-120 bushels per acre. With more secure yields, those farmers with irrigation will benefit from higher grain prices — and could look to buy more irrigation equipment ahead of next planting season,” said Michael Cox Managing Director at Piper Jaffray. In addition to Lindsay, Valmont Industries is a player in the space.

The USDA projects the national average yield for the corn crop this year will be 123.4 bushels per acre, a 17-year low. The crop is now expected to be 10.8 billion bushels, well below the USDA’s once rosey forecast for a bumper 14.8 billion bushels.

-By CNBC's Jackie DeAngelis