A. O. Smith Corporation (AOS - Free Report) recently announced its decision to discontinue operations at the company’s commercial water heater plant, based in Renton, WA. The Renton plant, a producer of commercial gas and electric specialty water heaters, electric boilers and hot water storage tanks currently employs about 55 people.
The company intends to relocate the production of commercial electric water heaters, storage tanks and boilers to its plants at McBee, SC and Lebanon, TN, with effect from June 15. Transfer of the production to the larger McBee and Lebanon facilities should allow the company to leverage economies of scale as well as shift its production nearer to its commercial engineering resources. Additionally, it is likely to allow A.O. Smith to achieve cost synergies in terms of rental savings. This is because McBee and Lebanon facilities are owned by the company. Moreover, it plans to consolidate the customer service function of the Renton facility into its existing customer care facility at Ashland City, TN.
Existing Business Scenario
A.O. Smith has been witnessing strong demand for its products in China, and boilers and commercial water heaters in the United States, which has accelerated its growth momentum. Also, the company’s defensive replacement market, which accounts for majority of the North American water heater and boiler volumes, has been on an uptrend in the recent quarters.
Moreover, the company’s multiple capital expenditure initiatives like construction of new water treatment manufacturing facilities and capacity expansion are expected to pave the way for its higher brand recognition and top-line growth. Meanwhile, the company has been leveraging to capitalize on the long-term investment opportunity in India, which is one of the rapidly developing economies of the world. Further, the acquisition of Aquasana, the residential water treatment company, has been adding to the company’s strength.
Notably, in the past six months, shares of this Zacks Rank #2 (Buy) company have rallied 11.3%, significantly outperforming the industry’s gain of 4.2%.
The company believes that the U.S. residential water heater volumes will shoot up in 2018, on the back of new construction and expansion of replacement demand. Further, U.S. commercial water heater industry volumes are also likely to go up this year, driven by strong demand for electric units as well as pre-buy of electric units in advance of regulatory change-driven price increase. These trends bode well for the company’s growth.
Other Stocks to Consider
Some other top-ranked stocks from the same space include Rexnord Corporation (RXN - Free Report) , Emerson Electric Co. (EMR - Free Report) and Capstone Turbine Corporation (CPST - Free Report) . While Rexnord sports a Zacks Rank #1 (Strong Buy), Emerson Electric and Capstone Turbine carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rexnord has outpaced estimates in the preceding four quarters, with an average earnings surprise of 12.6%.
Emerson Electric has surpassed estimates twice in the trailing four quarters, with an average positive earnings surprise of 2.8%.
Capstone Turbine has surpassed estimates twice in the trailing four quarters, with an average positive earnings surprise of 20.8%.
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