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No. of Recommendations: 3

Swimming With Aqua America
By Lenny Dykstra
4/10/2007 9:02 AM EDT

Water shortages out West have been getting a lot of media attention, and as cities continue to sprout in more arid climates, the lack of water will provide increasingly higher burdens for metropolitan growth -- a situation that could create investment opportunities.
Today's pick Aqua America has a limited presence out West, but the company's business model and outstanding CEO make it an excellent opportunity.

The company provides water or waste-water services to customers in 13 different states, with the majority of its revenue coming from Pennsylvania. In January 2007, Aqua America completed its purchase of the New York Water Service, providing a vast new market for the company; it's just the latest in a series of nearly 200 joint ventures and acquisitions over the past 10 years.

The abundance of acquisitions and agreements has allowed Aqua America to fatten its profit margins and grow quickly. As federal water-quality standards continue to tighten, existing infrastructure must be replaced in many localities. Smaller companies cannot afford the drastic overhaul necessary; through its size, continued acquisitions and keen management by its CEO, Nick DeBenedictis, Aqua America has gained a remarkable advantage in this area.

With the spate of new regulatory measures, the industry faces unique challenges in dealing with these increased costs. Water is tightly regulated by both local and federal offices. In order to implement a price increase, utility companies must have the capacity to withstand significant regulatory lag until the higher prices are approved.

DeBenedictis expects many of these increases to go into effect during the next couple of years, providing a significant boost to Aqua America and its shareholders, and that's why this is today's trade idea.
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