Water Industry Spending Still Up - But Clouds Loom

The world is worried about water - and investors are worried about water companies.

Midst mounting concerns over the scarcity and quality of the world's water supply, a recent ChangeWave survey of industry professionals found increased water project spending for 2008 - but not at the extraordinary levels of recent years. And troubles may lie ahead.

The February survey asked 147 respondents working in the water industry about project spending over the next 12 months, and two-thirds (67%) say they think spending will increase. But that's a 14-pt decline since our previous survey in June 2007.

Despite the decline these results are still relatively upbeat. But according to the survey there is a cloud looming over the water industry that could drive down the numbers - and its epicenter is in the U.S.

Zeroing In On the United States

The Wall Street Journal recently reported that 40% of fresh water consumption in the U.S. is from industrial applications and that water use normally drops in a recession. Moreover, the stock prices of many U.S. water utility companies have fallen recently on recession fears.

Add to this the findings of our ChangeWave survey, which shows a drop in the percentage of U.S. water industry respondents who think project spending will increase over the next 12 months within the private, federal and local government sectors.

Note the main reason for these more conservative growth projections is very straightforward:

By better than a 2-to-1 margin, industry respondents believe a U.S. recession would lead to decreased water project spending - as summarized in the following chart.

"Investors in water should keep a close eye on water project spending during a recession," says Josh Levine, co-editor of ChangeWave Investing. "But our survey also shows there are still plenty of opportunities out there. In particular, industry respondents are most excited about two sectors right now - Wastewater Treatment and Water Infrastructure Repair and Replacement. That's where we are focused."

Industry respondents were also excited about a short list of top water companies, with industry behemoth General Electric (GE) (42%) ranking as the leader. Of course, GE is a huge conglomerate and water is only a small part of their business. But there are a handful of other companies industry respondents cited as having momentum:

• American States Water (AWR) - the one utility of this group, engaged in the purchase, production, and distribution of water for California residential and commercial customers. California's favorable regulatory environment and rapidly increasing population bodes well for the company's future profits.

• Flowserve (FLS) - a seller of precision-engineered flow control equipment, Flowserve receives two-thirds of its business from overseas markets in water as well as other industries. Lately the company's been on a roll, having experienced record bookings in 2007.

• Gorman-Rupp (GRC) - the company's pumps and fluid control equipment are used in water, wastewater, and other industrial applications. Gorman-Rupp recently announced a 5-for-4 stock split and is enjoying record sales, a boost in new orders, and increased penetration within international markets.

• Calgon Carbon (CCC) - focuses on purifying water and air through the manufacture of granular activated carbon used in the removal of organic compounds from liquids and gases. Recently it's been an exceptional performer in the water group, its shares rising considerably over the past year.

• Nalco Holding Co. (NLC) - provides water treatment products and services to prevent corrosion, contamination and the build up of harmful deposits. Its focus is on production processes that enhance efficiency and improve customers' end products.

As Ben Franklin noted more than two centuries ago, "When the well's dry, we know the worth of water." There may be short term dips in the rate of water spending, but savvy investors know that water issues are going to be with us for decades - indeed, centuries - to come.

Keep your eye out for an upcoming ChangeWave survey that dives further into ongoing water industry trends.

Jim Woods co-wrote this article.

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This article summarizes the results of a recent ChangeWave Alliance survey. The Alliance is a research network of 15,000 business, technology and medical professionals who spend their everyday lives working on the front line of technological change. For more info on ChangeWave, or to sign up for real-time alerts email on the hottest technologies and companies, click here.

Comments

[EnergyDiversification]

This commentary was valuable, because it highlights how macro predictions of how many billions of dollars we need to spend on water infrastructure may not materialize in the near term. We have been hearing about water and general infrastructure upgrades for years.

There are a few overseas water plays -- difficult to gather good information and insight on, so this is an opportunity for any analysts with a deeper focus on water.

I would look at Epure (China based, Singapore traded) and Doosan (Korea).