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Why Is A. O. Smith (AOS) Up 3.9% Since Its Last Earnings Report?

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A month has gone by since the last earnings report for A. O. Smith Corporation (AOS - Free Report) . Shares have added about 3.9% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is AOS due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

A.O. Smith Beats on Q1 Earnings, Raises ’18 Guidance

A. O. Smith reported first-quarter 2018 earnings per share of 60 cents, ahead of the Zacks Consensus Estimate of 58 cents. The company continues its earnings beat streak of 25 straight quarters, which it broke once when it reported in-line earnings in second-quarter 2017.

The figure improved 18% from the year-ago quarter’s tally. The upside mainly came on the back of robust sales growth. However, higher steel prices and inflationary pressure on freight and other costs dampened earnings growth to some extent.

Inside the Headlines

The company generated record sales in the quarter which rose 6.5% year over year to $788 million. However, the figure missed the Zacks Consensus Estimate of $793 million by a whisker. A thriving water heater industry in the United States, strong demand for Lochinvar branded boilers and robust consumer product demand in China fueled the top-line growth.

A.O. Smith’s sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) grew 3% year over year to $501.7 million. Higher volumes of commercial water heaters, strong sales of boilers and pricing actions related to elevated steel costs proved conducive to the sales performance of this region. Water treatment products contributed about $8 million to revenues and boosted the segment’s growth.

Segmental operating earnings inched up 2% year over year to $106 million. The segment’s profit was favorably influenced by higher sales of commercial water heaters and boilers and pricing actions. However, the benefit was partially offset by flared up steel and other costs. Consequently, adjusted operating margin expanded 110 basis points (bps) to 22.5% on a year-over-year basis.

Quarterly sales at the Rest of the World segment (including China, India and Europe) were up 13% year over year to $293.8 million. The improvement came on the back of consistent solid customer demand for A.O. Smith’s gas tankless water-heating and water-treatment products. Also, favorable pricing actions added to the top line. However, a significant decline in air purification product sales in China dampened growth to some extent.

Operating earnings at the segment climbed 11% year over year to $36.1 million in the quarter. The favorable impact of excellent sales in China, along with favorable pricing actions, was partially offset by escalating steel costs and selling and engineering expenses. Operating margin contracted 20 bps to 12.3% year over year.

Share Repurchases

During the quarter, A.O. Smith repurchased around 520,000 common shares for $33 million. At the end of the quarter, the company has approximately 1.9 million shares remaining under the existing discretionary repurchase authority.

Liquidity & Cash Flow

Exiting the quarter on Mar 31, 2018, A.O. Smith’s cash and cash equivalents totaled $241.9 million compared with $293.4 million in the prior-year quarter. Cash generated from operations during the year came in at $43.2 million, compared to cash used in operations of $11.5 million last year, as the quarter’s cash flow benefited from higher adjusted net earnings and smaller increases in working capital.

At the end of the reported quarter, long-term debt was $285.5 million compared with $402.9 million witnessed at the end of Dec 31, 2017.

Other Developments

Recently, A. O. Smith announced that it was chosen as the primary supplier of water treatment products to all Lowe's home improvement stores in the United States. The company expects sales of roughly $15 million, along with start-up and transition costs, from the new business in 2018.The new relationship is likely to accelerate growth of the company’s North American water treatment product line.

Guidance

Concurrent with the first-quarter results, the company raised guidance for 2018. A.O. Smith expects adjusted earnings between $2.55 and $2.61, up from the previous range of $2.50-$2.58. The mid-point of the range reflects impressive year-over-year growth of 19%.

Additionally, the company expects to register revenue growth of 10-10.75% in 2018, supported by stable water heater replacement demand.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter.

A. O. Smith Corporation Price and Consensus

VGM Scores

At this time, AOS has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, AOS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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