Feel Good Investing: Consolidated Water $CWCO

In my writeup on coal, I compared it to the new tobacco. A business that is so immoral that most investors shy away, leading to lower prices, but higher yields. Altria and Philip Morris both have trailing 15-year returns over 10%.

But the opposite of coal and tobacco would be a business that investors love so much that they will bid up the multiple to obscene levels. When I was a financial advisor, that niche was water. I had clients who wanted to have at least 5% of their portfolio allocated to providing potable water so that they could sleep well at night, returns be damned.

For a beloved sector, the multiple will always seem expensive, but after a big selloff, it can still be poised for a bounce. Consolidated Water (CWCO) has been trading between a price to sales ratio of 2.3x and 3.0x since 2015, with the exception of the Covid lows. It currently sits at a price to sales of 2.75x, and the multiple might still be in a downtrend looking for 2.3x again. But, sales have been growing at 26% per year since 2021.

So, if you don’t mind catching a falling knife, you could buy CWCO here at 2.75x sales. Even if the multiple compresses for the next six months, when it rebounds at sometime in 2026 you are very likely to have over a 30% return over the next 18 months when it returns to the 3.0x price to sales multiple and enjoys aggressive revenue growth.

If you have the patience to wait for CWCO to trade down to 2.35x price to sales, that opportunity is probably coming within the next six months, but there is no guarantee. I might be impatient, but I think CWCO is worth a placeholder position so that you have dry powder to buy more on a dip, but if it takes off with the rest of the market when the tariff uncertainty is over, you still own some.

If you prefer to live your life on autopilot, as long as that baseline 26% revenue growth rate continues, CWCO should do well for many years to come. There is enormous room to grow as the world needs desalination and water treatment. Most of CWCO’s business so far is in The Bahamas and the Caymans, with a new focus on the US with a recent acquisition in Colorado. There are plenty more countries in the Caribbean and the rest of the world, the runway for growth still has a few orders of magnitude left to go.

Probably I should talk about the business before I start throwing out potential returns. Consolidated Water (CWCO) specializes in design, build, operate, and maintain contracts for water treatment and desalination facilities using reverse osmosis systems. They do have patents relating to process optimization and plant engineering, but the reverse osmosis technology itself is old and widespread.

These design, build, operate, maintain contracts can lead to lumpy revenues. One major contract can cause enormous spikes. But, once a plant is built, it provides a twenty to thirty year recurring revenue stream. That recurring revenue is up to $29.3 million for 2024, more than double the 2022 figure of $14.2 million.

A recent project in Port St. Lucie, Florida, caused a spike in services revenue for 2023. The completion of that contract caused a huge dropoff in sales for 2024, which had led to the recent share price weakness. But, a new contract in Oahu, Hawaii is scheduled to start construction in 2026, and the buildout phase of the project alone should result in an additional $149 million of revenue split between 2026 and 2027. So even if it proves to be another temporary spike, in the short run it should cause a share price reaction just as CWCO enjoyed in 2023. For the longer term, another project means more recurring operation and maintenance revenue for the next 20 years.

There is risk in having around $75 million of 2026 and 2027 revenue tied to a single contract. A delay in permitting or a failure to agree on final terms would be a huge negative catalyst for CWCO, so position size would need to be relatively small. But Oahu isn’t the only growth project, it’s just the largest. There are two desalination plants under construction in The Bahamas, doubling CWCO’s footprint in the country. Also, there is room for inorganic growth through acquisitions. When multiples are low, like in coal and tobacco, the only returns come from dividends. But when multiples are high, CWCO can buy new revenues more cheaply than the stock market values them.

Aside from the risk of the Oahu contract falling apart, CWCO has no debt and about $135 million in cash and receivables net of payables. The market capitalization sits at about $370 million today. For a small cap, that’s a fortress balance sheet, and again, they don’t need to spend that money returning capital to shareholders, with a price to sales ratio of 2.75x, they can use that cash to buy more revenue.

High multiple businesses aren’t my typical hunting grounds. And CWCO might have more room to fall before the next big rally. But, they could announce new contracts or new acquisitions on any earnings call, and the whole market has sold off under tariff uncertainty. There are things that could go wrong for CWCO, but there are a lot of things that could go right too. 2026 Revenues of $200 million and a 3x price to sales ratio would make $600 market capitalization company.

Consolidated Water Co. (CWCO) $23.17: $37.85 by mid 2027