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A. O. Smith (AOS) Cuts '22 View on Water Heater Volume Softness

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A. O. Smith (AOS - Free Report) has provided a bleak forecast for the third quarter of 2022 due to weakness in North American residential water heater volumes. On the same ground, the company lowered its full-year 2022 guidance.

Bearish Q3 View

For the third quarter, AOS expects sales to decrease 4% year over year to $874 million due to higher-than-expected North American residential water heater channel inventory de-stocking. Third-quarter earnings per share are expected to be 71 cents per share, reflecting a decrease of 13% from the year-ago period. Adjusted earnings per share are estimated to be 69 cents per share, indicating a decline of 15%. The Zacks Consensus Estimate for the same stands at 84 cents.

A. O. Smith attributed this bleak projection to weaker-than-expected North American residential water heater demand as a result of significant wholesale inventory de-stocking. The company associates this de-stocking activity with its return to pre-pandemic lead times, which were higher due to pandemic-related supply-chain disruptions.


Apart from weak residential water volumes impacting production efficiency, high raw material costs also weighed on AOS’ third-quarter projection. Results are set to release on Oct 27.

For the first nine months of 2022, the company expects $180.9 million of cash from operations, while free cash flow is anticipated to be $130 million.

Revised 2022 Guidance

A. O. Smith expects North American residential water heater volumes to remain weak through the rest of 2022. As a result, the company now expects sales to increase 5-7% year over year compared with 12-14% expected earlier. The company expects sales of $3,715-$3,785 million in 2022.

The guidance includes a benefit of approximately $100 million from the Giant Factories acquisition in October 2021. AOS expects North American residential water heater volumes to decline approximately 12-13% in 2022.

For 2022, A. O. Smith estimates earnings in the range of $1.29-$1.39 per share compared with $1.56-$1.76 expected earlier. Adjusted earnings are expected to be $3.05-$3.15 compared with the prior view of $3.35-$3.55. The Zacks Consensus Estimate for the same stands at $3.38.

While AOS has lowered its forecast on a year-over-year basis, it expects a sequential improvement in residential water heater volumes. The anticipated betterment in residential water heater volumes, along with expectations of improvement in residential water heater production efficiency due to the right-sizing of manufacturing operations, is expected to lead to a sequential increase in the company’s earnings in the fourth quarter.

Dividend Hike

On a separate note, A. O. Smith recently hiked its quarterly cash dividend by 7% to 30 cents per share (annually: $1.20). The first installment of the dividend is payable to shareholders on Nov 15, of record as of Oct 31. The company has raised its annual dividend for more than 25 consecutive years.

Zacks Rank & Key Picks

A. O. Smith currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks within the broader Industrial Products sector are as follows:

RBC Bearings (RBC - Free Report) presently sports a Zacks Rank #1 (Strong Buy). RBC delivered a trailing four-quarter earnings surprise of 9.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks.

RBC Bearings has an estimated earnings growth rate of 90.2% for the current year. Shares of the company have gained approximately 5% so far this year.

Carlisle Companies (CSL - Free Report) currently carries a Zacks Rank #2 (Buy), currently. CSL pulled off a trailing four-quarter earnings surprise of 28%, on average.
 
Carlisle has an estimated earnings growth rate of 114.4% for the current year. The stock has rallied 13.5% so far this year.


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