< Return to Bulls pageWater As An Asset Class
"Clean water for domestic consumption as well as industrial use is not only going to be an important trend of this decade but explosive population growth combined with higher standards of living could make it the biggest trend of this century."
PHO has performed inline with the rest of the market dropping 43% since November 2007 but has done better than other commodities like oil and steel that have lost more than 65% of their value over the same time period. While PHO provides a lot of exposure to water related infrastructure companies (79% of holdings as of 1/30/2009) and utilities (nearly 9% of holdings), I noticed that companies like PICO Holdings (PICO) and J.G. Boswell (BWEL.PK) that own a lot of land with water rights are missing.
The company through its subsidiary Vidler Water Company develops, stores and supplies water in Nevada, Arizona, Idaho and Colorado. As you can see from the chart below, water resources and storage operations account for nearly 39% of net book value as of June 30, 2008. As of the third quarter this mix has shifted with water resources now accounting for 41.4% of book value. The operative words here are "net book value" and not revenue or earnings. The company's earnings are quite volatile and its primary focus is improving book value per share, which it has done consistently at an annual rate of 18% since 1994.
Due to current market conditions, shareholder equity fell to $501.3 million as of September 30, 2008 from $518.6 million in the previous quarter. This drop was primarily on account of a -17.2% drop in the investment portfolio of their investment operations in the first nine months of 2008. PICO's stock sold off with the rest of the market, pushing the stock from a high of $48.22 on September 2, 2008 to its current price of $25.42.
When compared to other land holding companies, PICO's Enterprise Value/Acre is one of the lowest at just $824 but you also have to keep in mind that the quality of its land in Nevada contributes to this low value. The company currently trades below book value and in recent weeks insiders have started buying. With its focus on book value, the company has a very strong balance sheet with nearly $140 million in cash and just $28 million in long term debt. Given the long-term potential of its sector, track record of their management and current valuation, I believe PICO represents an attractive investment even at this juncture. I am going to add a small position to the model portfolio by purchasing 150 shares of PICO. I plan on initiating a position in my personal portfolio as well.
