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Here's Why You Should Steer Clear of A. O. Smith (AOS) Now

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A. O. Smith Corporation (AOS - Free Report) is struggling with lower residential water heater volumes and reduced consumer demand in China. High raw material costs and foreign currency headwinds are added concerns for the company.

Lower residential water heater volumes are hurting the North American segment’s (revenues were flat year over year in the third quarter of 2022) performance. Due to this headwind, A. O. Smith has lowered its full-year forecast. A. O. Smith expects sales to increase 5-7% year over year in 2022 compared with 12-14% expected earlier. The company expects North American residential water heater volumes to decline approximately 12-13% in 2022. A. O. Smith expects adjusted earnings of $3.05-$3.15 for 2022 compared with the prior view of $3.35-$3.55.

The commercial water heater industry is also struggling with weakness in electrical products. AOS expects commercial gas water heater industry shipments to either decline slightly or remain flat year over year in 2022.

Lower consumer demand in China due to coronavirus-related lockdowns is impacting revenues from the Rest of the World, which declined 13% year over year in the third quarter. Sales from China decreased 10% in the third quarter. For the fourth quarter, A. O. Smith expects consumer demand to decline approximately 15% compared to last year.

Due to its significant presence in Asian countries like China and India, A. O. Smith is exposed to foreign-currency woes, which are hurting the company’s top line. Adverse foreign currency movements impacted China’s sales by approximately $12 million in the third quarter. It impacted total sales by around $16 million in the third quarter.

High raw material and transportation costs are pushing up A. O. Smith’s cost of sales. In the first nine months of 2022, cost of sales jumped 15.3% year over year. Escalating cost of sales and cost increases from production inefficiencies are hurting the company’s bottom line (down 15% year over year in the third quarter). Supply-chain constraints and labor shortages are other headwinds for the company.

Amid these headwinds, shares of A. O. Smith, carrying a Zacks Rank #4 (Sell), have slumped nearly 36% in the year-to-date period, against the industry’s decline of 17.3%.

Zacks Investment Research
Image Source: Zacks Investment Research

The negativity surrounding the stock is evident from the Zacks Consensus Estimate for 2022 earnings being revised downward by 11.5% in the past 60 days.

Key Picks

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

Enerpac Tool Group Corp. (EPAC - Free Report) delivered an average four-quarter earnings surprise of 3.4%. EPAC presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks.

Enerpac Tool’s estimated earnings growth rate for the current fiscal year is 44.6%. Shares of the company have jumped 32.3% in the past six months.

Applied Industrial Technologies, Inc. (AIT - Free Report) presently flaunts a Zacks Rank #1. The company delivered a trailing four-quarter earnings surprise of 24.8%, on average.

Applied Industrial has an estimated earnings growth rate of 14.3% for the current fiscal year. Shares of the company have gained 23% in the past six months.

IDEX Corporation (IEX - Free Report) presently has a Zacks Rank of 2 (Buy). IDEX pulled off a trailing four-quarter earnings surprise of 5.7% on average.

IDEX has an estimated earnings growth rate of 28.3% for the current year. Shares of the company have rallied 21.5% in the past six months.

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