The Old Economy’s Back…and It’s Making Great Money
Tuesday, January 29th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
There are very few investors in the stock market that don’t like consistency. A company doesn’t have to be the fastest growing business in the marketplace; but if it grows both revenues and earnings in a consistent manner, then stock market investors are going to notice.
There’s a relatively new trend in the global economy, and it really began to stand out in the ashes of the subprime mortgage crisis. The old economy is making great money, and you can see this in the stock market, with great performances from Union Pacific Corporation (NYSE/UNP), Cummins Inc. (NYSE/CMI), 3M Company (NYSE/MMM), and The Procter & Gamble Company (NYSE/PG), among others. By “old economy,” I mean well-established companies that provide the basics; the products and services we need in order for people and the economy to function on a daily basis. Without them, the real economy would be lost. These are traditional bricks-and-mortar businesses in mature industries. (See “Fast Food Offers More Value Menus—and More Cash, Too.”) That doesn’t mean these businesses don’t use technology; they just don’t sell it.
For example, for me, the old economy doesn’t only include Alcoa Inc. (NYSE/AA) and The Dow Chemical Company (NYSE/DOW); it does include companies like Johnson & Johnson (NYSE/JNJ), PepsiCo, Inc. (NYSE/PEP), and Fastenal Company (NASDAQ/FAST). Pull up Fastenal’s long-term stock market chart, and you’ll see that it quintupled in just the last 10 years. So old economy definitely doesn’t equate to sub-par returns on the stock market.
Let me highlight for you a great company that’s doing fantastic right now. I categorize it as an old economy business because A.O. Smith Corporation (NYSE/AOS) is in the business of manufacturing and selling water heaters and boilers. It’s just the kind of industry you get giddy about.
This old economy company had a great year in 2012, both operationally and on the stock market. In the most recent fourth quarter of 2012, the company’s revenues grew to $524 million, compared to $476 million. Earnings rose to $39.3 million, up from $32.1 million in the fourth quarter of 2011. The company’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
A.O. Smith has been making good money on the stock market for a long time, and the business pays a small dividend. The stock is up approximately 312%, not including dividends, over the last 10 years, so it turns out that the old economy water heater business is pretty good. The company has a solid business in Canada and the U.S. (sales were up 11% in the fourth quarter), and it is selling its branded products in China (where sales were up 20% in the fourth quarter).
What I like about this business is its consistency. Even though this is an old economy business—it doesn’t make any difference from the investor’s point of view. The stock has been going strong since 1990, and that’s impressive.
With all the stock market turmoil over the years, it pays to give less attention to headlines and the main stock market averages, focusing on individual businesses instead. The old economy is back, and so are old economy stocks. I never knew the water heater business was so darn profitable.