Make Money in Homebuilders Without Building Homes

By Mitchell Clark, B.Comm. for Profit Confidential

With better numbers from the U.S. housing market, the water heater business is on the upswing.

On the stock market, A. O. Smith Corporation (NYSE/AOS) is one of the leading manufacturers of residential and commercial water heaters and boilers. The company actually started as a small machine shop in 1874 in Milwaukee, Wisconsin.

What I like about this business is its consistency, both in terms of its operations and its performance on the stock market.

In its latest earnings report, company management said that business is getting better. First-quarter revenues grew nine percent to a record $509.6 million. The company’s CEO said that business in the U.S. market is improving with new residential construction showing some life after five years.

A. O. Smith’s first-quarter 2013 earnings were down to $39.0 million, as compared to earnings of $47.5 million on one-time charges related to the closure of a plant.

A. O. Smith upped its full-year guidance, recently announced a two-for-one stock split, and boosted its quarterly dividend by 20%. The company’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

There is good news on the earnings front, and in many situations, it’s with old economy stocks. (See “Great Old Economy Businesses That Isn’t Full of Hot Air.”)

As is always the case in the stock market, the business cycle exists, and some companies are much better at managing their business than others.

Not all things are rosy in the industrial economy. I use Anixter International Inc. (NYSE/AXE) as a stock market benchmark, because it sells cable, wire, and fasteners.

Anixter’s 2013 first-quarter sales dropped two percent to $1.5 billion, while earnings fell 23% to $42.6 million year-over-year. Like most companies, Anixter said that it expects stronger business conditions in the bottom half of this year. We’ll see.

But sales for Amphenol Corporation (NYSE/APH), which sells electrical cable, fiber optic cable, connectors, antennas, and specialty cables, grew a solid 10% to $1.08 billion in the first quarter. Margins improved substantially, and both earnings and sales beat the Street. The company upped its full-year guidance, and on the stock market, the stock’s position just hit an all-time record high.

So, for many corporations, business conditions aren’t all-around bad. Strength in old economy names is a positive development.

What is lacking, clearly, is uniformity in business conditions. And even those companies that are growing still aren’t doing a lot of new hiring.

There are tons of corporate earnings reports related to the U.S. housing market over the next several days. The stock market shine has come off the group. Consensus estimates are all over the map with many of these companies.

I’m amazed at a company like A. O. Smith in its ability to generate growth in such a mature business. The company is expanding in China, but it’s doing so methodically and deliberately, keeping a sharp eye on costs. It’s definitely the right way to go.

On the stock market, Anixter’s shares went up on its weaker earnings news.