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A.O. Smith Poised on High Demand, Solid China Prospects

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We have issued an updated research report on AO Smith Corp. (AOS - Free Report) on May 31, 2016. A.O. Smith has been an industry leader in North America for decades, and has now unlocked significant growth opportunities in China and India.

The company has been seeing robust growth in China, and is gradually expanding into smaller cities and newer categories. It is also developing its e-commerce platform and growing its commercial business. Specifically, China’s water treatment market is expected to grow at an impressive 30% till 2020, which heralds lucrative prospects for the company.

A.O. Smith is also expanding its footprint beyond the residential market into the commercial water treatment market with an industry-leading product pipeline. Also, the water filtration product portfolio sales continue to show phenomenal growth.

A.O. Smith’s dominant foothold in the North American water heater market, coupled with thriving prospects in residential and commercial boiler markets are expected to accelerate its growth in the coming quarters.

This year, the company plans to invest about $20 million in the construction of a new water treatment manufacturing and air purification assembly facility in China and also complete capacity expansion at two North America plants in 2016. The company also intends to invest $9 million to support the ERP implementation.

A.O. Smith is incurring significant costs to support expansion in China, in addition to developmental costs associated with new products, thus dragging the bottom line. In fact, ERP implementation costs are also expected to rise to $24 million for 2016. Although these expenses are projected to be beneficial for the long run, it will restrict the bottom-line growth in the near term.

The significant rise in steel prices earlier this year is expected to continue exerting pressure on the company’s margins. Historically, there has been a lag in A.O. Smith’s ability to recover increased material costs from customers and this could impact profits, going forward. In addition, devaluation of the Chinese currency and overall foreign currency risks remain a significant headwind for the coming quarters.

Regarding the estimate revisions, analysts have had mixed opinions on this Zacks Rank #3 (Hold) stock, considering its growth prospects and the ongoing broader market concerns. Over the last seven days, the Zacks Consensus Estimate for 2016 decreased by 1 penny to $3.53, while that for 2017 remained constant at $3.98.

Stocks to Consider

Some better-ranked stocks in the same space include ESCO Technologies Inc. (ESE - Free Report) , Powell Industries, Inc. (POWL - Free Report) and Eaton Corporation plc (ETN - Free Report) . All these stocks hold a Zacks Rank #2 (Buy).

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