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A.O. Smith (AOS) Up 6.3% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Smith (A.O.) Corporation (AOS - Free Report) . Shares have added about 6.3% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

A.O. Smith Beats on Q4 Earnings; Revenues Up Y/Y

A.O. Smith maintained its earnings streak in fourth-quarter 2016, with earnings per share of $0.47, surpassing the Zacks Consensus Estimate by a penny.

The earnings figure also improved 4.4% from the year-ago tally of $0.45. The bottom-line improvement mainly came on the back of robust sales growth.

For full-year 2016, the company’s earnings per share came in at $1.85, up an impressive 17.1% on a year-over-year basis. The figure also steered past the projected range of $1.81–$1.83.

Inside the Headlines

Net sales in the quarter were up 9.2% year over year to $698.1 million. However, net sales fell short of the Zacks Consensus Estimate of $707 million.

Stellar demand of water heating and water treatment products in China and increased volumes of residential and commercial water heaters in the U.S. supported the impressive top-line growth during the reported quarter.

For full-year 2016, the company’s net sales came in at $2.7 billion and were up 6.0% from the year-ago tally.

Talking about segments, A.O. Smith’s sales in the North America segment (comprises U.S. and Canadian water heaters and boilers) grew 5.3 % year over year to $435.6 million. Higher volumes of residential and commercial water heaters in the U.S. proved conducive to the sales performance of the region. In addition, the previously completed acquisition of residential water treatment company – Aquasana – contributed $12.2 million to revenues, thus supplementing the segment’s growth.

However, Segmental operating earnings fell 3% year over year to $89.4 million. Higher material costs and higher–than-expected incremental ERP implementation expenses more than offset the benefits of price increase and strong profitability of Lochinvar branded products, resulting in the decline of operating earnings. Operating margin expanded 210 bps to 22.3% on a year-over-year basis.

Quarterly sales at the Rest of the World segment (China, India & Europe) rose 15.7% year over year to $268.1 million. This improvement came largely on the back of consistent solid customer demand for A.O. Smith’s premium water heating and water treatment products, particularly in China (up 24%, excluding impacts of U.S. dollar).

Operating earnings at the segment surged 34% year over year to $38.2 million in the quarter. Excellent sales in China more than offset multiple headwinds, including higher selling and advertising costs and currency headwinds. Operating margin advanced 190 bps to 14.2% on a year-over-year basis.

Share Repurchases

During fourth-quarter 2016, A.O. Smith repurchased around 726,000 common shares for $35 million. At the end of 2016, the company’s repurchases totaled approximately 3.3 million shares at a cost of $135.2 million.

During the quarter, A.O. Smith completed a two-for-one stock split.  Additionally, the company increased the authorized shares available for repurchase by 3.0 million shares. Exiting the year, it has approximately 4.9 million shares remained on the existing discretionary repurchase authority.

Reviewing its sound financial health, A.O. Smith approved a 17% hike in its quarterly cash dividend to $.14 per share. The dividend is payable on Feb 15, 2017 to shareholders of record as of Jan 31. This comes across as a good move to reward shareholders by increasing their wealth.

Liquidity & Cash Flow

Exiting the quarter on Dec 31, 2016, A.O. Smith’s cash and cash equivalents were $330.4 million compared with $323.6 million at the end of Dec 31, 2015.

At the end of the quarter, long-term debt was $316.4 million, compared with $236.1 million at the end of Dec 31, 2015.

Guidance

Concurrent with its fourth-quarter results, A.O. Smith offered its full-year 2017 guidance. The company projects its earnings per share to lie in the range of $1.98–$2.08. The midpoint of the 2017 earnings guidance represents a 10% rise over 2016.

The company is optimistic that China will act as its strongest top-line driver, led by stellar demand of water treatment and air purification products. Sales in China are likely to grow about 15% in local currency for the year 2017. Also, impressive sales of residential water heater sales and boilers & water treatment products in the U.S. are expected to accelerate the company’s growth.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

VGM Scores

At this time, A.O Smith's  stock has a strong Growth Score of 'A', though it is lagging a bit on the momentum front with a 'B'. Following a similar course, the stock was allocated also a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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