Water, both the lack and cleanliness of it, have been in the news of late as droughts cause reservoir levels to decline and cities like Jackson, Miss. are faced with aging systems that leave residents without. And now, investors will have a new way to invest as demands for clean water only increase.
Wednesday, healthcare/industrial conglomerate Danaher (ticker: DHR) announced it would spin off its Environmental & Applied Solutions, or EAS, business segment as a separately traded public company.
That's the company's water business which provides instruments, tests, and software for utilities and businesses around the globe as well as Danaher's water quality division.
"We believe that EAS will be advantaged as a stand-alone company with greater opportunities to pursue high-impact organic and inorganic investments," said Danaher CEO Rainer Blair in a news release. "The combination of a resilient business model—with more than 50% recurring revenue—and a talented team with a foundation built on the Danaher Business System will position EAS to continue delivering the same outstanding results it has as part of Danaher."
The Environmental & Applied Solutions segment generated almost $4.7 billion in 2021 sales and produced earnings before interest, taxes, depreciation, and amortization, of Ebitda, of about $1.2 billion. Between 2016 and 2021, sales grew at an average annual rate of about 4.7%. Ebitda margins have come in around 25% to 26% over that span.
Industrial companies in the S&P 500 trade for about 11 times estimated 2023 Ebitda, though water companies tend to trade a little higher than that. Evoqua Water Technologies (AQUA) and Xylem (XYL), for instance, trade for about 17 times and 18 times estimated 2023 Ebitda, respectively. Danaher, for its part, trades for about 20 times.
The spin should be completed in the fourth quarter of 2023. Investors interested in the new water stock can either buy Danaher shares now or wait for the spin to be completed.
Buying Danaher has worked for a long time. The stock has returned more than 17% a year on average for 20 years. The S&P 500 has returned about 8% a year over the same span.
investors seem to like the spin news. Danaher stock is up 3.7% in premarket trading Thursday. S&P 500 futures are down 0.2%. Dow Jones Industrial Average futures are flat.