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A. O. Smith (AOS) to Benefit From Strong Demand Amid Risks

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A. O. Smith Corporation (AOS - Free Report) has been benefiting from robust demand for water heaters, boilers, and water treatment products in North America. Improvement in the demand environment in China, and the company’s focus on investments in product developments and strong price management capabilities are likely to drive its performance in the quarters ahead. For 2021, the company anticipates year-over-year sales growth of 13-14% from its water treatment business in North America. For the same year, it expects total revenues to improve in the range of 17% to 18% on a year-over-year basis.

The company intends to strengthen and expand its businesses through buyouts. In July 2021, it acquired Master Water Conditioning Corporation, which is expected to boost its water treatment business in North America. A. O. Smith anticipates its North America water treatment sales, including the Master Water Conditioning acquisition, to exceed $200 million in 2021. The company’s Water-Right business acquisition has enhanced its growth opportunities in the water treatment industry.

The company’s strong liquidity position adds to its strength. Exiting second-quarter 2021, its cash and marketable securities were $582 million. For 2021, it expects cash flow from operations to be $500-$525 million. It remains committed to rewarding its shareholders through repurchases and dividend payouts. In the first half of 2021, the company paid out dividends worth $83.9 million to shareholders and repurchased shares worth $198.1 million. The quarterly dividend rate was hiked by 8% in October 2020.

However, it has been experiencing escalating costs and operating expenses over time. In the second-quarter 2021, its cost of sales increased 29.3% on a year-over-year basis and its selling, general and administrative expenses rose 11%. The company’s restructuring initiatives have been adversely impacting its short-term earnings. Its restructuring and severance expenses hurt earnings by 4 cents in 2020.

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In the past three months, this Zacks Rank #3 (Hold) stock has gained 2.5% compared with the industry’s growth of 6.3%.

Key Picks

Some better-ranked stocks from the same space are SPX FLOW, Inc. (FLOW - Free Report) , Eaton Corporation plc (ETN - Free Report) and Regal Beloit Corporation . While SPX FLOW currently sports a Zacks Rank #1 (Strong Buy), Eaton and Regal Beloit carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SPX FLOW has a trailing four-quarter earnings surprise of 48.16%, on average.

Eaton has a trailing four-quarter earnings surprise of 10.87%, on average.

Regal Beloit has a trailing four-quarter earnings surprise of 20.63%, on average.

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