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Unfortunately, so-called “forever chemicals” have become almost omnipresent in the environment. They are increasingly being found in plants, animals, and humans. In people, they have been found to have a number of effects including: causing cancer, disrupting immune responses to vaccinations, damaging liver functions, and lowering fertility.
So, what are PFAS? Technically, they are known as perfluoroalkyl and polyfluoroalkyl substances. They’re called “forever chemicals” because their strong fluorine-carbon bonds do not break down naturally, and therefore persist in people and the environment.
These chemicals are used to make coatings and products that resist heat, oil, stains, grease and water, and can be found in thousands of industrial and consumer goods, such as Teflon cooking utensils and products with Scotchgard.
In fact, PFAS currently come in an estimated 15,000 varieties. They can be found in outdoor clothing, camping gear, shoes, coated papers for fast-food takeout, firefighting foams and surfactants (compounds that reduce surface tension) for electronics manufacturing. They’re even used in toilet paper, dental floss, semiconductors, and solar panels.
The bad effects PFAS have on human health have created billions of dollars worth of liabilities for companies. For example, in 2023, 3M (MMM) agreed to pay a massive $10.3 billion settlement to public water suppliers that had detected PFAS in drinking water.
EPA Crackdown
On April 10, the Environmental Protection Agency (EPA) finalized an enforceable 4 parts per trillion (ppt) limit on perfluorooctanoic acid (PFOA) and perfluorooctane sulfonic acid (PFOS) in drinking water. The agency set a non-enforceable maximum contaminant level goal for PFOA and PFOS at zero, reflecting research showing that no level of exposure is risk-free from cancer and other diseases.
The EPA rule also sets a limit of 10 ppt on three other categories of per- and polyfluoroalkyl substances (PFAS) in drinking water, including perfluorononanoic acid (PFNA), perfluorohexane sulfonate (PFHxS), and “GenX” chemicals. GenX chemicals are made by Chemours (CC), which owns the trade name, to produce fluoropolymers used in semiconductor chips.
The EPA is requiring water utilities to remove nearly all of the substances from tap water. Up to 6,700 water systems - serving about 100 million people - or between 6% and 10% of all the drinking water systems in the United States, will be affected by the new standards.
Water systems across the country will now have to test for PFAS under the new standards, and then they’ll have five years to purchase, install, and operate PFAS-removal technology, if contaminants are detected.
About $1 billion in infrastructure funding will be available to help water systems test for PFAS and remove it. An additional $12 billion is available for drinking water system improvements, including addressing contaminants such as PFAS.
This move is expected to cost many billions of dollars to implement. The American Water Works Association said last year that it would cost utilities $3.8 billion annually to comply with the new regulation. Other estimates are only a bit more conservative, saying it will cost $3 billion a year.
Water Treatment and Xylem
Despite some government aid, this will create a huge opportunity for the companies that can remove these chemicals. One obvious segment that will benefit - thanks to the new EPA regulation - is the water treatment sector. In the U.S. alone, PFAS removal had been estimated to have a $250 billion market potential.
One company ideally positioned to win business in PFAS pollution mitigation is the water technology company Xylem (XYL), which serves customers in more than 150 countries and has revenues of $8.1 billion.
In May 2023, Xylem acquired Evoqua Water Technologies, a water treatment solutions and services company, in an all-stock transaction valued at $7.5 billion. The combination created the world's largest pure-play water technology company.
PFAs remediation is nothing new for Xylem. It has been working on PFAS solutions for over 10 years, deploying more than 80 PFAS remediation projects in the U.S. alone for municipal and industrial customers.
The company has solutions today that can help mitigate the challenge of bringing PFAS levels down to the MCL (maximum contaminant level) allowed, if not even lower. The technologies Xylem currently has available to tackle the problem include granular activated carbon and ion exchange resins, and there are some instances where reverse osmosis also works.
Buy XYL Stock
Strong demand in utility end markets and multi-year tailwinds stemming from federal infrastructure stimulus - along with recovering component and chip availability - facilitates Xylem’s ability to capitalize on rising orders in all of its divisions.
The company was already benefiting from the digital transformation of the water business, with accelerating industry adoption of digital solutions.
And now, with updated EPA rules on PFAS and other contaminants in drinking water, there is an additional demand catalyst as Xylem takes advantage of its Evoqua acquisition to capture those pollutants, and bring to market more innovative technologies that enable the detection and destruction of harmful substances in water.
XYL stock is up 22% year-to-date and 26.2% over the past year. It's a buy below $150.
