Spending on Water Projects Still Rising But Clouds Loom

By: Jim Woods And Paul Carton

As concerns grow over water shortages and the quality of the world's supply, a recent industry survey finds increased water project spending for 2008 ' but not at the levels of previous years. And there may be trouble ahead.

According to the survey of 147 professionals working in the water industry, two-thirds (67%) think water project spending will increase over the next 12 months ' but that represents a sizable 14-point drop from the previous survey in June 2007.

Despite the decline, these results are still relatively upbeat. However, the survey shows clouds looming over the industry that could push spending numbers down further ' and they're centered 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 falls during an economic recession. Moreover, the stock prices of many U.S. water utility companies have declined recently on fears of a recession.

Add to this the findings of our 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.

"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."

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 with its granular activated carbon, which is 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.

Ben Franklin stated it clearly more than two centuries ago, "When the well's dry, we know the worth of water."

And while there may be blips in the rate of water spending short term, wise investors know that water issues are going to be with us for centuries to come.

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