In search of the next great growth stock, investors typically seek out innovative technology companies. Yet one of the most appealing growth stocks in recent memory is a  140 year-old company that makes water tanks and heaters for residential and commercial buildings.

Indeed a savvy expansion into new markets has helped A. O. Smith Corp. (NYSE: AOS) generate impressive top- and bottom-line growth. And the business momentum appears set to continue.

During the recent domestic housing crisis,  A. O. Smith predictably struggled. This is a stock that will always be correlated with the U.S. housing market, which accounts for more than 40% of total company sales.

As the U.S. housing market recovered, so too has A.O. Smith. The company has grown its earnings per share 38% annually since 2010.

Yet even as the housing market has bounced back from formerly depressed levels, there is still plenty of slack in the housing market.

New housing starts bottomed out in the recession and are still below historical averages. At around 1.2 million housing starts per year, the current pace of new home construction is only around half of new household formation. Housing construction still has a lot of growth in front of it, and A.O. Smith is a great way to play the trend.

Yet this isn’t simply a domestic-focused housing play. The company was early to recognize the potential of the Chinese and Indian markets, both of which are seeing their economies grow at a 5%-to-8% annual pace (versus the U.S. at 2%).

A.O. Smith’s international sales are a China story for now. The company has grown sales 28% per year over the past 10 years in the country. However, there is still a ton of growth left to be had in China. The one-two punch of increased urbanization and a growing middle class will keep the demand for modern amenities like water heaters strong, and A.O. Smith will be there to satisfy the demand.

On the company’s second quarter conference call, CEO Ajita Rajendra noted that point-of-use residential water treatment systems in China are  expected to grow 35%-to-40% per year over the next five years.

#-ad_banner-#A.O. Smith’s impressive growth may soon put the company in play.  David Cote, CEO of Honeywell International, Inc. (NYSE: HON), recently told Bloomberg that he was actively pursuing deals for companies related to water. Just this week Honeywell agreed to purchase the Elster Group, a water meter company based in Germany. A company that builds water tanks and heaters, like AOS, could be a natural extension. Other firms with large water products divisions such as General Electric Co. (NYSE: GE) could also be interested in bringing A.O. Smith into its portfolio.

At around 23 times 2015’s projected earnings, the valuation for A.O. Smith doesn’t scream “bargain.” However, for a company growing rapidly and with the possibility of a buyout with a healthy premium at any point, it’s a very fair price for a very good company.

Risks To Consider: The company is highly focused on China. A slowdown in this market could reduce the company’s robust growth plans in the country. However, the industrialization of China is a multi-decade story. A near-term slowdown in China would delay, but not derail A.O. Smith’s prospects in the country.

Action To Take –> At $72 per share, the company is trading at fair value and should provide decades of growth or a quick 20% or higher premium in the event of a buyout. For investors who demand a discount, consider selling put options to capture the premium while hoping for the price to fall.

P.S. — I mentioned above that innovation is often a great place to look for growth opportunities. Recently, Dave Forest, the strategist behind Top 10 Stocks, has been talking about one of the greatest innovations to come out of America in decades. It’s been dubbed “Sky-Fi,” but others are calling it “Internet 3.0.” Either way, this is a mega-trend that investors can play in the coming months. If you’d like to learn more about this innovation, click here to see our research on the topic.