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A.O. Smith (AOS) Up 3.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for A.O. Smith (AOS - Free Report) . Shares have added about 3.7% in that time frame, outperforming the S&P 500.

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

A. O. Smith Earnings & Revenues Miss Estimates in Q3

A. O. Smith reported disappointing third-quarter 2018 results with both earnings and revenues missing estimates.

The company's adjusted earnings in the reported quarter were 61 cents per share, missing the Zacks Consensus Estimate of 63 cents. However, the bottom line recorded an increase of 13% from the year-ago figure of 54 cents.

Inside the Headlines

The company's sales in the reported quarter rose 0.6% year over year to $754.1 million. Top-line growth was partially offset by weaker-than-expected water heater sales in the United States and China.

However, the figure missed the Zacks Consensus Estimate of $804.25 million.

A.O. Smith's sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) were relatively flat year over year at $486.9 million. The company's pricing actions on water heaters and boilers were offset by decline in volumes of water heaters in the United States. Water treatment products contributed about $9 million to revenues and boosted the segment's growth.

Segmental operating earnings fell 4.3% year over year to $105.6 million. The decline was primarily attributable to lower sales of water heaters and higher steel and freight expenses, partially offset by pricing actions. Consequently, adjusted operating margin declined 100 basis points (bps) to 21.7%.

Quarterly sales at the Rest of the World segment (including China, India and Europe) were up 1.5% year over year to $274.1 million. The improvement came on the back of increase in sales of water treatment and air purification products in China. However, a decline in electric water heater sales dampened growth to some extent.

Operating earnings at the segment climbed 16% year over year to $39.1 million in the quarter. The lower-than-expected costs related to incentive programs in China along with lower losses in India proved beneficial. Operating margin expanded 180 bps to 14.3%.

Share Repurchases

During the first nine months of the year, A.O. Smith repurchased around 1.7 million shares for $106 million. At the end of the third quarter, the company had approximately 3.2 million shares remaining under the existing discretionary repurchase authority.

Liquidity & Cash Flow

Exiting the quarter on Sep 30, 2018, A.O. Smith's cash and cash equivalents totaled $233 million compared with $346.6 million as of Dec 31, 2017.

At the end of the reported quarter, long-term debt was $193.3 million compared with $402.9 million as of Dec 31, 2017.

Outlook

Concurrent with third-quarter results, the company lowered guidance for 2018. A.O. Smith expects adjusted earnings between $2.57 and $2.60, down from the previous range of $2.59-$2.63. In addition, the company expects to register revenue growth of about 7% in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, A.O. Smith has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

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




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