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A. O. Smith Displays Solid Prospects, Headwinds Persist

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On Sep 4, we issued an updated research report on A. O. Smith Corporation (AOS - Free Report) .

In the past three months, this Zacks Rank #3 (Hold) stock has lost 4.4% against the industry’s growth of 7.3%.

Present Scenario

A. O. Smith has been benefiting from solid demand for its water treatment products in the United States along with improvement in the effectiveness of its direct-to-consumer channel. For 2020, the company expects sales growth of 20-22% from its water treatment business in North America. Going forward, its focus on investments in product developments, automation and production efficiency is also likely to be beneficial.

Also, A. O. Smith’s acquisition of Water-Right (in April 2019) has strengthened its growth opportunities in the water treatment industry. For instance, the company anticipates the Water-Right business to generate incremental sales in the second half of 2020.

In addition, it remains committed to rewarding shareholders handsomely through dividend payments and share buybacks. In the first half of 2020, the company used $77.8 million for paying out dividends, and repurchasing shares worth $56.7 million. Notably, the quarterly dividend rate was hiked by 9% in October 2019. It’s worth noting that its share buyback activities have been temporarily halted due to the coronavirus crisis.

However, A. O. Smith has been witnessing a low demand environment for commercial water heater and boilers in North America. For 2020, it expects sales volume from both of its commercial water heater and boiler businesses in North America to decline 10% on a year-over-year basis. In addition, weak end markets in India amid the pandemic might be a concern.

Moreover, the company anticipates incurring a capital expenditure of $60-$70 million in 2020. High capital expenditure might negatively impact its short-term liquidity.

In the past 30 days, the Zacks Consensus Estimate for the company’s 2020 earnings has trended down from $1.83 to $1.81 on one downward estimate revision against none upward.

Key Picks

Some better-ranked stocks from the same space are ABB Ltd (ABB - Free Report) , Enersys (ENS - Free Report) and Regal Beloit Corporation (RBC - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ABB delivered a positive earnings surprise of 100.00%, in the last reported quarter.

Enersys delivered a positive earnings surprise of 5.20%, on average, in the trailing four quarters.

Regal Beloit delivered a positive earnings surprise of 18.91%, on average, in the trailing four quarters.

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