Shares of A. O. Smith Corporation (AOS Quick QuoteAOS - Free Report) have gained nearly 22% in the year-to-date period, outperforming the industry’s 20.2% increase. The upside can be linked primarily to robust demand for commercial and residential water heaters.

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Catalysts Behind the Price Surge

Despite lower boiler sales, strong demand for commercial and residential water heaters is supporting AOS’ North America segment. The company expects North American water treatment sales to increase 5-7% for 2023.  

Higher revenues in the Rest of the World segment (revenues up 6% year over year in the second quarter) due to strong demand for residential and commercial water treatment products in China (sales up 15% year over year in the second quarter) and India (sales grew 15% year over year in the second quarter) are also expected to have driven A. O. Smith’s shares. The company expects China sales to increase 3-5% in 2023, while India sales are anticipated to increase 15%.

Amid steady demand for commercial and residential water heaters, A. O. Smith’s improved earnings guidance for 2023 sparks optimism. The company expects adjusted earnings of $3.45-$3.60 for the current year compared with $3.30-$3.50 anticipated earlier. This indicates a year-over-year increase of 12% at the mid-point.

Handsome rewards to shareholders through dividends and share buybacks also drove the A. O. Smith stock higher. In the first six months of 2023, the company paid dividends of $90.6 million, up 3.1% year over year. In the same period, AOS repurchased 1.08 million shares for approximately $70 million. For 2023, the company expects to repurchase shares worth approximately $300 million. Approximately 6.8 million shares are yet to be repurchased under the existing share repurchase authorization, which was boosted by an additional 7.5 million shares in January.

Will the Uptrend Continue?

Improving supply chains and signs of gradual uptick in manufacturing activities augur well for A. O. Smith’s growth. While manufacturing activities remain weak, it is showing subtle signs of improvement as evidenced by the July Supply Management report. The Manufacturing Purchasing Manager’s Index remained in the contraction territory, touching 46.4% last month. However, it increased 0.4 percentage points from the June figure, while new orders rose 1.7 percentage points.

Amid a general softness in the economy and lower demand, A. O. Smith has provided a conservative outlook for 2023. The company expects sales to either increase or decrease by up to 2%. It expects residential water heater industry volumes to either remain flat or increase up to 2% year over year. Lower boiler sales in the North America segment may weigh on the company’s performance.

Zacks Rank & Other Stocks to Consider

A. O. Smith sports a Zacks Rank #1 (Strong Buy) at present. Some other top-ranked stocks within the broader Industrial Products sector are as follows:

Graham Corporation (GHM Quick QuoteGHM - Free Report) currently flaunts a Zacks Rank #1. The company pulled off a trailing four-quarter earnings surprise of 243.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks.

Graham has an estimated earnings growth rate of 400% for the current fiscal year. The stock has rallied 68.4% so far this year.

Flowserve Corporation (FLS Quick QuoteFLS - Free Report) is also a Zacks #1 Ranked player. The company delivered a trailing four-quarter earnings surprise of 6.2%, on average.

Flowserve has an estimated earnings growth rate of 79.1% for the current year. The stock has jumped 24.5% so far this year.