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 Fund managers from T. Rowe Price, Janus, and Mairs & Power are
among those that have increased their stakes in firms such as Ecolab
Inc, Roper Technologies Inc and Flowserve Corp that make smart
meters, efficient heaters, and software that helps restaurants,
hotels and homeowners cut back on their water usage.
Shares of Roper Technologies Inc, which makes leak testing and flow
measurement equipment, are up nearly 13 percent for the year. Shares
of Ecolab, meanwhile, which among other businesses makes commercial
laundry systems that cut water consumption by 40 percent, are up 10
percent for the year.
The rally in water technology companies should continue even if the
California drought ends soon, analysts said. Global spending on
water-related technology is set to grow to an estimated $25 billion
by 2018, up from $15 billion in 2010, according Global Water
Intelligence, an Oxford, England-based research firm.
"It's clear that water scarcity is only going to increase, and we
think that there will be a several-year investment cycle as homes
and businesses look at ways to maximize the water they do have,"
said Pete Johnson, an analyst at the $4.3 billion Mairs & Power
Growth fund.
WATER PLAYS
Despite the rush to water-related stocks, active and passive funds
that focus on water are struggling, largely as a result of outsized
positions in water utilities whose shares have been hit by concerns
about the effects of mandatory usage cutbacks in California and the
likelihood of rising interest rates.
The $868 million PowerShares Water Resources ETF, for instance, has
approximately one fifth of its portfolio invested in water
utilities, such as California Water Service Group, the third-largest
water utility in the country. Thanks to a 1.1-percent decline in the
shares of California Water Service and other water utilities like
it, the fund has gained less than 1 percent this year, compared to a
3.3 percent gain in the benchmark Standard & Poor's 500.
Instead, funds that do not focus exclusively on water are
benefiting. The Mairs & Power Growth fund, for instance, is the
largest shareholder of Badger Meter Inc, a $929 million market cap
company based in Milwaukee that makes water meters for municipal
water utilities. Shares of the company are up 8.2 percent for the
year to date.
Rich Meeusen, the chief executive of the company, told analysts
April 21 that while the California drought is "tragic for the
state," it "does represent an opportunity for Badger Meter."
The company estimates that there are more than 235,000 homes and
businesses in California that pay a flat fee for water, regardless
of amount consumed. With homeowners typically cutting usage by up to
20 percent once their usage is monitored, Meeusen said the company
is in discussion with many California water utilities to provide
either meters or software that allows homeowners to monitor daily
water consumption.
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The $15.9 billion T. Rowe Price New Horizons fund and the $8.6
billion T. Rowe Price Small Cap Value fund, meanwhile, have been
increasing their positions in A.O. Smith Corp, a $6.4 billion market
cap company that makes residential and commercial water heating
systems. While the funds were originally attracted to the company
due to its growth in China, its expanding line of high-efficiency
water heaters geared for restaurants and hotels also make it
attractive, said Curt Organt, an analyst at T. Rowe Price.
"There's a very strong positive mix shift story going on" as more
businesses look to high-efficiency models - the company's
highest-margin business - to conserve water, Organt said.
Shares of the company are up 27.4 percent for the year to date, and
hit a record closing high of $72.30 on June 3.
Aaron Schaechterle, an analyst who works on several funds at Janus,
said that, in addition to A.O. Smith, his funds have been adding
shares of Rexnord Corp, a $2.6 billion company that is expanding its
Zurn line of low-flow toilets. Shares of the company are down 7.8
percent for the year after the company's sales fell in the last
quarter, which the company attributed to the stronger dollar and a
slower than expected growth in new construction.
Yet Schaechterle said that the company's investments in technology
should help it gain market share over time.
"We're not playing a water scarcity theme per se, but instead the
companies that are investing aggressively in technology products
even in an old line industry," he said.
(Reporting by David Randall. Editing by Linda Stern and John
Pickering)
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