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A.O. Smith (AOS) Q2 Earnings in Line, Guidance Raised Again

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A. O. Smith Corporation (AOS - Free Report) reported second-quarter 2017 earnings per share of 53 cents, which came in line with the Zacks Consensus Estimate, thereby breaking its earnings beat streak which lasted for 22 straight quarters.

The earnings figure improved 8.2% from the year-ago tally of 49 cents. The bottom-line improvement mainly came on the back of robust sales growth.

Inside the Headlines

Net sales in the quarter were up an impressive 10.7% year over year to $738.2 million. It also topped the Zacks Consensus Estimate of $728 million. A thriving water heater industry in the U.S., as well as robust consumer product demand in China fueled the top-line growth.

Talking about segments, A.O. Smith’s sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) grew 8.8% year over year to $470.7 million. Higher volumes of residential and commercial water heaters in the U.S. proved conducive to the sales performance of this region. In addition, the previously completed acquisition of residential water treatment company – Aquasana – contributed $13 million to revenues, thus supplementing the segment’s growth.

Segmental operating earnings rose 4.8% year over year to $109.2 million. The segment’s profit was favorably impacted by higher sales of commercial water heaters and boilers, and the Aug 2016 pricing actions. However, the benefit was partially offset by elevated steel costs. However, operating margin contracted 90 bps to 23.2% on a year-over-year basis, due to higher steel prices. Lower operating margin of the acquired Aquasana business also contributed to the decline.

Quarterly sales at the Rest of the World segment (China, India and Europe) rose 13.8% year over year to $272.8 million. The improvement came largely on the back of consistent solid customer demand for A.O. Smith’s premium water heating and water treatment products, particularly in China (up 20%, excluding impacts of the U.S. dollar). While water treatment sales in China grew over 40%, air purification sales quadrupled year over year.

Smith (A.O.) Corporation Price, Consensus and EPS Surprise

Operating earnings at the segment edged down 1.5% year over year to $32.5 million in the quarter. The favorable impact of excellent sales in China was more than offset by multiple headwinds, including higher steel costs, higher selling and advertising costs, less profitable sales mix in China and currency headwinds. Operating margin contracted 190 bps to 11.9% year over year.

Share Repurchases

During the first half of 2017, A.O. Smith repurchased around 1.3 million common shares for $66.2 million. At the end of the quarter, the company has approximately 3.6 million shares remaining under the existing discretionary repurchase.

Liquidity & Cash Flow

Exiting the quarter on Jun 30, 2017, A.O. Smith’s cash and cash equivalents were $306.6 million compared with $330.4 million at the end of Dec 31, 2016.

At the end of the quarter, long-term debt was $367.7 million compared with $316.4 million at the end of Dec 31, 2016.

Guidance

Concurrent with the second-quarter results, the company raised its full-year earnings guidance once again. For full-year 2017, the company expects revenues to grow in the range of 10—11% now, as opposed to the earlier guided range of 9–10%.

Further, A.O. Smith now anticipates 2017 earnings to lie in the range of $2.07–$2.11 per share compared to the earlier guided range of $2.03–$2.09. The upward guidance revision is primarily attributable to outstanding top- and bottom-line performances in the reported quarter.

Our Take

A.O. Smith’s consistent sales and earnings growth over the past several quarters highlight the company’s underlying strength. We believe stellar prospects in China and the U.S. end markets will continue to accelerate growth, going forward. Also, dominant foothold in the North American water heater market, along with thriving prospects in the residential and commercial boiler markets are likely to stoke growth.

This apart, the Zacks Rank #2 (Buy) company’s solid financial health, strategic capital expenditures to fortify its market position and overall positive trends bode well for long-term growth.

Other Stocks to Consider

Some other similarly-ranked stocks in the same space include Barnes Group Inc. (B - Free Report) , Eaton Corporation, PLC (ETN - Free Report) and Regal Beloit Corporation (RBC - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 8.9%.

Eaton also has a decent earnings surprise history, with an average beat of 3.3% over the trailing four quarters, beating estimates thrice.

Regal Beloit generated two beats over the trailing four quarters, for an average positive surprise of 1.5%.

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