(Nasdaq: PCYO)
Current Rating: 6
Current 12-18 month Price Target: $20.00
Raised Rating from 4 to 6 and Price target from $15 to $20 on 02-27-06
The company's most relevant water assets in terms of the near and intermediate terms are located on the eastern slope of the Rocky Mountains to the southeast of downtown Denver, Colorado. The Denver metropolitan area faces two rather onerous variables with respect to the availability of water resources. First, much of the Colorado "front range" of which Denver is a part, has a relatively dry climate. Consequently, it typically experiences quite limited amounts of annual rainfall, so most of its surface water results from annual snow runoff. In years where the snow pack is lower than normal, water issues in the Denver metro area can become problematic. Second, the area's natural challenges are exacerbated by the fact that the Colorado front range and the Denver Metro area have experienced considerable population growth over the past two decades further complicating the issue of allocating scarce water. Combinations such as these have lead to considerable challenges for developers, municipalities, employers and others to whom growth is a major fundamental issue. In some instances, these challenges include for example legislative edicts which require comprehensive water plans ahead of development of any kind.
The area's combination of rapid growth and dry climate, exacerbated by recent drought conditions, has placed a premium on water. As the report delineates, guaranteeing the availability of water is becoming a more and more stringent prerequisite to further development in many parts of Denver. That fact is not hard to understand, as the U.S. Department of the Interior has designated the Denver metro area as one of the places in the continental U.S. that is "highly likely" to face a water crises over the next 20 years. To that end, PCYO has acquired significant water rights in a fast growing portion of the front range. Those acquisitions include surface water and other characteristics that I believe will allow them to execute what I think is an elegant strategy that will allow them to not only provide water and wastewater services within the Lowry Range where the water resides, but also to surrounding areas where viable long term water and wastewater plans have perhaps not been fully rationalized. Additionally, the opportunity here is magnified by the fact that water fees and rates, a good portion of which will represent recurring revenues for the company, are increasing rapidly, a trend that looks as though it may continue for some time.
I think water is going to become a bigger and bigger issue in many areas of the country as we move forward. As a result, PCYO possesses the rights to what I think could be a very precious commodity. Moreover, the company has spent the past few years positioning itself in a way to monetize its water assets in what appears to be the near, intermediate and long terms. (That notion includes a recent financing that bolstered the balance sheet.) The monetization of the strategy includes a considerable and growing recurring opportunity, so the real question becomes "how quickly will they be able to sell the water availability they have?". While as I said, I think my model reflects modest penetration to that end, the company is clearly positioned in a way that could accelerate my estimates considerably. The additional export opportunities both on the face and those that I believe will be created by the expansion of its surface water infrastructure are good examples. In either case, I think the cash flow here will prove compelling, and could speak to DCF valuations well in excess of current prices.
DISCLAIMER STATEMENT
The information contained in this report has been written by David Lavigne of EdgeWater Research Partners LLC ("Edgewater") and has been derived from sources considered reliable, but cannot be guaranteed by us. Edgewater and Lavigne are not aware of any material conflict of interest known at the time of the publication of this report. Financial projections and estimates herein represent our independent analysis based upon information in conjunction with the Company's publicly available financial statements. Edgewater and Lavigne may maintain positions in the securities referenced, which may change at any time without notice. Edgewater does not receive fees, warrants or any other compensation from issuers in connection with its research. It does however, encourage issuers and it representatives to subscribe to Edgewater's research, and from time to time, issuers and or their representatives may also purchase individual copies of Edgewater's research products. Edgewater and Lavigne may own options, rights or warrants to purchase any of the securities of the Company. This report is for informational purposes only and is not to be construed as specific investment advice or recommendations, nor as an offer to sell or a solicitation of an offer to buy any securities. The securities referenced are speculative in nature and may not be suitable for your specific investment objective. For specific investment advice or recommendations, please consult with your investment representative.
As of 03-01-06, employees and or Directors of PCYO have subscribed to 0 full annual subscriptions for Edgewater’s newsletter and research information. In addition, In January 2005, PCYO has purchased 10 Initial Coverage research reports from Edgewater at $50 each. In September 2004, PCYO paid a fee of $6,000 to attend EdgeWater's "Fall 2004 MicroCap Conference for Investment Professionals". In February 2005, PCYO paid a fee of $8,500 to attend EdgeWater's "Spring 2005 MicroCap Conference for Investment Professionals".
