As economies develop and populations grow, one thing stays constant: the water supply.
In spite of the vast oceans around us, only 2.5% of the water on earth is drinkable, and only 1% of that drinkable water is easily accessible.
Aside from enormous geographical difficulties, Chinese authorities face the constant problem of pollution. According to a 2016 article in The New York Times, more than 80% of China’s water resources recently tested were not fit for human consumption.
That’s why our pick today, which derives 34% of its revenue from water products in China, is critical to the country’s continuing economic development.
This water stock has been around for 145 years and has long been one of the most dependable dividend stocks on the market. But in the last decade and a half, the company has been growing at a rapid pace in order to help China address its water issues.
As of 2018, China now brings in more than $1 billion in annual revenue for the company. And that revenue is still growing nearly 20% annually.
This is a company that’s going to be in high demand for years to come. And best of all, the stock has just been given a top score by our Money Morning Stock VQScore™ system.
That means not only is this a dependable stock for the long term, but it’s also due for a rise in the immediate future.
After More Than a Century in Business, This Company Is Entering a New Growth Spurt
A.O. Smith Corp. (NYSE: AOS) was founded in Milwaukee in 1874 as a specialty hardware company. Over the years, the company evolved over its first several decades from manufacturing parts for baby carriages and bicycles to some of the earliest mass-produced steel car frames.
In the early 1900s, the company experimented with fusing glass to steel, which resulted in glass-lined kegs, brewery tanks, and – most importantly – water heaters.
A.O. Smith’s glass-lined water heaters would set the standard for the industry for decades to come. And it established the company as one of the leaders in water products, a position it still holds today.
Today, the company has over 16,700 employees in eight countries. It specializes in water heaters and treatment products for both commercial and residential uses, in both point-of-entry (i.e., installed during construction) and consumer segments.
A.O. Smith sold nearly 10 million units in 2018. Based on its own sales figures compared to total sales tracked by the Air-Conditioning, Heating, & Refrigeration Institute (AHRI), the company estimates that it has a leading 38% market share of the U.S. residential market and a 50% share of the commercial market.
But it’s China where the real growth has happened. Since generating $50 million in revenue from China in 2003, A.O. Smith has boosted that figure every single year. In 2018, Chinese sales passed the billion-dollar mark. That comes out to a 19% compound annual growth rate (CAGR) over the last decade.
That’s largely due to its leadership in reverse-osmosis water filtration. Reverse osmosis represented just 20.7% of China’s market in 2010 but has more than quadrupled since then to 83.1% in 2017.
What makes this process particularly valuable in China is its effectiveness at removing heavy metals from water. That’s one of the most persistent problems with polluted water in both China and India – where A.O. Smith also has an increasing presence through its Bangalore office.
This success has come remarkably fast for a company that has only recently got into the water treatment game. A.O. Smith’s global water treatment revenue was just $20 million in 2009 and is projected to surpass $450 million this year. That’s better than a $2,000% increase over the last decade.
The company has demonstrated its commitment to expanding this segment with some key acquisitions. Just this month, it acquired Water-Right Inc., based in nearby Appleton, which produces water treatment solutions under multiple brands and applications.
This new growth segment has enabled A.O. Smith to produce numbers far beyond what you would expect from a 145-year-old firm. And that’s why now is the best time ever to grab your shares.
Now Is the Time to Buy AOS
AOS took a hit late last year with the rest of the market, dropping from around $60 in late September to just over $40 near the end of the year. It’s been recovering since then, however, now sitting around $55.
The fundamentals suggest there’s still plenty of room to grow.
Sales has grown at a 10% CAGR since 2010, rising from $1.5 billion to $3.2 billion in that time.
Earnings per share has fared even better. It’s up every year since 2011, from $0.53 to $2.61 last year. That was a 20.3% jump in 2018. And according to FactSet, EPS is projected to grow through at least 2022.
That’s even as A.O. Smith has increased its dividend in 10 consecutive years, with a 230% rise in the last five years. Its 1.58% yield beats the industry average by 55%.
The company also boosted its free cash flow last year by 57% to $364 million, keeping itself in good position to continue making acquisitions and expanding its footprint.
In short, with AOS, you get the dependability of a blue-chip stock with the excitement of an industry that is absolutely critical to support the rapidly growing economies in Asia.
That makes this stock a no-brainer.
— Stephen Mack
Source: Money Morning