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A. O. Smith (AOS) to Benefit From Products and Acquisition

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On Dec 2, we issued an updated research report on A. O. Smith Corporation (AOS - Free Report) .

In the past three months, this Zacks Rank #2 (Buy) stock has returned 13.5% compared with the industry’s growth of 13.6%.

Present Scenario

A. O. Smith has been witnessing strength in its North America operating segment on the back of solid demand for water treatment products and residential water heater products. For 2020, the company anticipates witnessing sales growth of 22-24% from its water treatment business in North America on a year-over-year basis. Also, it expects residential water heater sales volumes to grow 4% in the United States for the year. Going forward, recovery in demand for its products in China, along with its focus on investments in product developments, automation and production efficiency, is likely to be beneficial.

Also, the company’s Water-Right acquisition (April 2019) has been strengthening its position in the water treatment industry, especially in the wholesale and independent dealer array. Notably, the company expects the Water-Right business to generate incremental sales this year.

Moreover, its robust liquidity position adds to its strength. At the end of third quarter of 2020, A. O. Smith had cash and marketable securities balance of $509 million, along with undrawn borrowing capacity on its credit facility of $500 million. For the first three quarters of 2020, its cash flow from operations totaled $330.4 million, reflecting an increase of 18% from the year-ago period. In addition, the company follows a shareholder-friendly policies.  Notably, it paid out dividends worth $116.5 million to shareholders in the first nine months of 2020, besides repurchasing 1.3 million shares for $56.7 million. Also, it hiked its quarterly dividend rate 8% in October 2020.

However, a persistent low demand environment for commercial water heater and boilers in North America, owing to the coronavirus-led issues, remains a major concern. For 2020, it expects commercial water heater sales volume to decline about 10% on a year-over-year basis. Also, sales from boiler business in North America are likely to fall in mid-single digit range. In addition, weak end markets in India poses an issue.

Other Key Picks

Some other top-ranked stocks from the same space are Regal Beloit Corporation (RBC - Free Report) , Rexnord Corporation (RXN - Free Report) and Franklin Electric Co., Inc. (FELE - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Regal Beloit delivered a positive earnings surprise of 28.42%, on average, in the trailing four quarters.

Rexnord delivered a positive earnings surprise of 20.62%, on average, in the trailing four quarters.

Franklin Electric delivered a positive earnings surprise of 12.82%, on average, in the trailing four quarters.

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