By Paul Carton and Jim Woods

The world is worried about water -- and investors are worried about water companies.

Amid mounting concerns about the scarcity and quality of the world's water supply, a ChangeWave survey of industry professionals found increased water project spending for 2008 -- but not at the extraordinary levels of recent years. And troubles may lie ahead.

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The February survey asked 147 professionals in the water industry about project spending during the next 12 months. Sixty-seven percent of respondents said they think spending will increase, which is a 14-point decline since our previous survey in June 2007.

Despite the decline, these results are still relatively upbeat. However, according to the survey, there is a cloud looming over the industry that could drive down these numbers -- and the United States is at its epicenter.

Zeroing In on the United States

The Wall Street Journal recently reported that 40% of fresh water in the United States is consumed in industrial applications, and that water use normally drops during a recession. Moreover, the stock prices of many U.S. water utilities have fallen recently on recession fears.

Add to this the findings from our latest survey, which show a drop in the percentage of U.S. industry respondents who think water project spending will increase within the private, federal and local government sectors during the next 12 months.

The main reason for these more-conservative growth projections is straightforward: Respondents believe a U.S. recession would lead to decreased water project spending.

This is clearly summarized by the following chart:

"Investors in water should always keep a close eye on water spending during a period of recession," said 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 areas -- wastewater treatment and water infrastructure repair and replacement. That's where we are focused right now."

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Respondents were also excited about a short list of water companies, with industry behemoth General Electric (GE) ranking first with 42%. Of course, GE is a huge conglomerate, and water is only a small part of its business. Here are a handful of other companies respondents cited as having momentum:

American States Water (AWR): This utility company purchases, produces and distributes water for California residential and commercial customers. The state's favorable regulatory environment and rapidly increasing population bodes well for the company's future profits.

Flowserve (FLS): FLS sells precision-engineered flow control equipment. It receives two-thirds of its business from overseas markets in water as well as other industries. The company has been on a roll lately, 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): This company focuses on purifying air and water through the manufacture of granular-activated carbon used in the removal of organic compounds from liquids and gases. Recently, it's been an exceptional performer in the water group, and its shares rose 200% during the past year.

Nalco Holding Co. (NLC): This firm 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.

There may be short-term dips in the rate of water spending, but savvy investors know that water issues are going to be with us for decades to come.

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

Keep an eye out for an upcoming ChangeWave survey that dives deeply into several ongoing water industry trends.

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Paul Carton is the Research Director of the ChangeWave Alliance. Jim Woods is ChangeWave's Senior Editor. The Alliance is a network of 15,000 highly-qualified business, technology and medical professionals in leading companies of select industries. The Alliance is surveyed weekly on a wide range of business and investment research and intelligence topics.

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