Water is one of the most important, if not the most important, resources for life to exist and thrive. And while the planet is covered, the vast majority is not drinkable. It is logical, then, that there would be a significant one market opportunity for companies that can supply water, treat water, distribute water and more. One such company that has done exceptionally well from a stock price perspective in recent months is Consolidated Water (NASDAQ: CWCO). While the company had a pretty tough 2021 fiscal year compared to the previous year, the picture is improving this year and the business continues to get some pretty valuable contracts that should add value to investors in the future. However, given the rise we’ve seen in the company’s stock price, I think the company is just a “waiting” prospect these days. But investors would be cautious to monitor the company closely with the expectation of repurchasing if stocks decline or if fundamentals continue to improve.
The last article I wrote about Consolidated Water was published in December 2021. At that time, I acknowledged that the company had been in pain due to the COVID-19 pandemic. However, I also said that the pain will eventually subside and that the company was showing some signs of recovery. Also, I said that the stocks seemed rather cheap and as a result probably offered some opportunity to move forward. Since then, the business has even exceeded my expectations. While the S&P 500 fell 12.9% in value, Consolidated Water shares rose 33.3%.
This stock price strength occurred even despite another tough year for the business. During fiscal year 2021, Consolidated Water generated revenue of $ 66.9 million. In fact, it was 7.9% below the $ 72.6 million generated in 2020. Not only that, but also below the $ 68.8 million that the company reported for its pre-fiscal year. pandemic of 2019. According to management, the fall in sales between 2020 and 2021 was driven. largely due to a significant decrease in revenue associated with the company’s manufacturing segment. Sales in this segment plummeted from $ 12.4 million to just $ 4.1 million. This decline occurred when the segment’s largest customer, which accounted for 80% of the segment’s sales in 2020, decided that, for stock management purposes, it was suspending its purchases of Consolidated Water products. Without this decline, revenue would have increased by 4.3% year-on-year.
The company’s profitability also worsened in 2021. Net income from ongoing operations amounted to $ 3.4 million. This compares with the $ 8.6 million observed in 2020. Other profitability metrics showed similar results. Operating cash flow decreased from $ 19 million to $ 8.6 million, while the adjusted equivalent decreased from $ 18 million to $ 14.5 million. Even EBITDA declined from $ 20.6 million to $ 16 million. The worsening of the company’s results was driven in part by falling revenues. However, the company also suffered a significant operating loss associated with the same segment. Without this loss, the company’s operating income would have increased by 20% by 2021. This would probably have leaked to the company’s bottom line, including cash flow data.
The good news for investors is that the business is showing good signs so far this year. In the first quarter of 2022, revenue of $ 19.6 million was 14.6% above the $ 17.1 million reported the same time a year earlier. Profitability figures were also encouraging. Net income of $ 2.3 million easily exceeded the $ 1.3 million reported a year earlier. Operating cash flow more than tripled, from $ 1.5 million to $ 4.9 million. Meanwhile, EBITDA also improved, from $ 3.2 million to $ 3.8 million.
Aside from the key data, the company also boasted of some attractive contracts recently. More recently, management announced a contract under which the company will build a wastewater treatment plant for a customer in Arizona. This project will last an estimated 26 months and involves a fee of $ 82 million for the company’s services. So the management got another contract. That happened the same month, just seven days earlier, in fact, on May 10thth when the company announced a comprehensive contract involving the design, construction and operation of a $ 20 million desalination plant in the Cayman Islands.
Given the start of fiscal year 2022 and the lack of guidance on what to expect for the year as a whole, I think the best way to value the business is through the lens of the year 2021 as well as comparing these data with fiscal year 2020. Depending on the price of profits, Consolidated Water shares are trading at a multiple of 65.9. This compares with the 26 that the company would trade if the financial results recover from what the company experienced in 2020. When we consider the volatility of profits in recent years, I do not think this is the best way to value the company . For example, if we use price to adjust the multiple operating cash flow, we are looking at a reading of 15.5. This is more than the 9.9 we get if we base it on the 2020 figures. Using the EV approach to EBITDA, we end up with multiples of 11.2 and 8.7, respectively, for the years 2021 and 2020. put it in perspective, the last time I wrote about the company, my calculations for fiscal year 2020 were 25.4, 8.9, and 7, respectively. Using our 2020 figures, Consolidated Water has become more expensive in two out of three scenarios.
Right now, I would say that in many ways, things are getting better for Consolidated Water. The contracts that have recently been awarded to the company are promising and we are seeing some good signs of recovery. Stocks are far from overpriced right now, but they’re also incredibly cheap. I would say the company may be slightly undervalued, but it is more likely not to be closer to a fair price. In the long run, I suspect the company will do well for itself and its shareholders. But given the price increase we’ve seen and what that means for the company’s multiples, I think right now there are better prospects in the market.