Stocks Going Into The Tank-Less

By Will Ashworth | October 19, 2009 AAA

America is finally starting to get the hint that it can't continue to consume energy in such a wasteful manner. One example of this newfound religion is the tankless water heater. Invented in Germany in 1895, Robert Bosch GmbH sells almost 1 million of them in Europe annually. Available in the U.S. since 1979, I thought I'd look for some public companies that manufacture these energy-efficient water savers. As it turns out, most of the big players in the North American market are either German or Japanese. Fear not, we do have some U.S.-listed subjects for this article. Read on and I'll fill you in.

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More Expensive
Consumer Reports suggests that the energy and water savings you gain from using a tankless water heater aren't worth the extra cost as they are two to three times as expensive to purchase as an ordinary water heater. What Consumer Reports doesn't take into account are two important factors. First, selling more units each year will lower prices over time, making them much more affordable. Second, if we don't do what needs to be done today to curb our energy and water use, it won't matter how cheap they are. We'll be six feet under. Americans aren't that dumb. If the Europeans can figure it out, so can the United States. The market will grow. It's only a matter of time.

Buy American
A.O. Smith (NYSE: AOS) is the largest manufacturer of water heaters in North America. In 2008, residential water heater sales accounted for $945 million or 65% of its overall sales. The remaining 35% comes from selling electric motors, where it's the fourth-largest producer in North America. Interestingly, it estimates that 70% of its commercial and residential water heater sales are to replace older units. Only 15% comes from new home construction, which reduces the impact of recessions. Not content to rest on its North American laurels, it's headed overseas to China and India. Starting in 1995, it's now one of the top two sellers of residential water heaters in China, generating $187 million in sales in 2008, up 27% from 2007. In September, it paid $77 million for Tianlong Holding Ltd., a small but significant acquisition that gets the company into the global water technology business, a $425 billion industry with significant competitors including 3M (NYSE: MMM), ITT (NYSE: ITT), Pentair (NYSE: PNR) and many more. It's not going to be easy, but I think that's the way A.O. Smith likes it. Now firmly established in China, it plans to conquer India as well. Go for it. Just don't forget the red, white and blue.

The Other Guy
You may have heard of the other North American player in the tankless water heater market. It's none other than General Electric (NYSE: GE). Apparently they're made in Japan, although it recently announced that starting in 2011 it would be making its new hybrid water heater at its 1,000-acre appliance park in Lexington, Ky. GE can paint this as a patriotic move, but it wouldn't have happened if there weren't energy rebates available through state-run Energy Star programs made possible by $300 million from the stimulus plan. CEO Jeffrey Immelt can say all he wants about how important U.S. manufacturing jobs are to his company, but the reality is he's probably going to sell the appliance division - a ball and chain that contributes just 6.5% of total segment revenues and 1.4% of total segment profits - as soon as the credit markets allow. Sure, we're talking billions here, but for one of the world's largest companies it's a drop in the bucket. It'll be gone soon enough.

Bottom Line
Given the shortage of American companies participating in the tankless water market, it's amazing to me that an attractive company like A.O. Smith actually still exists. It pays a small dividend (every year for the last 40), and although its share price is close to a 52-week high, this is one of those stocks you stick in a drawer and pull out at Christmas sometime down the road. I guarantee you'll be happy with the gift to yourself. (For more, see What Does It Mean To Be Green?)

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