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A.O. Smith (AOS) to Report Q4 Earnings: What's in the Cards?

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A.O. Smith Corporation (AOS - Free Report) is scheduled to report fourth-quarter 2018 results on Jan 29, before the market opens.

The company pulled off an average positive earnings surprise of 3.47% in the trailing four quarters, beating estimates thrice. Notably, in the last reported quarter, the company posted earnings of 61 cents, which lagged the Zacks Consensus Estimate of 63 cents by 3.17%.

In the past three months, the company’s shares have gained 2.8% against 3.7% decline recorded by the industry it belongs to.

Let’s see how things are shaping up for this announcement.

Factors to Affect Q4 Results

Over the past few quarters, A.O. Smith's strong position in the replacement market for U.S. water heaters and boilers has been a staple growth driver. The company expects the U.S. residential water heater volumes for 2018 to shoot up approximately 250,000-300,000 units on the back of strong replacement demand. Also, it expects its boiler business to grow roughly 10%. Further, the launch of water treatment product portfolio in more than 1,700 Lowe's stores is supporting the upswing. Notably, in third-quarter 2018, Aquasana, Hague and water treatment products at Lowe's added $9 million to the North America segment sales. The same trend is likely to continue and boost the company's top-line results in the fourth quarter of 2018.

A.O. Smith's business in China has grown significantly over the years. In the third quarter, sales generated from Chinese operations grew 2.5% year over year in local currency. Over the long term, the company expects overall water heater market in China to strengthen on the back of growth in water treatment and air purification products. However, slowdown in housing sales and international trade issues will play spoilsport. Also, over time, A.O. Smith expects improved operations in India.

Amid this backdrop, the Zacks Consensus Estimate for revenues from A.O. Smith's North America geographic segment for the to-be-reported quarter is currently pegged at $519 million, reflecting growth of 12.6% year over year. On the other hand, revenues from Rest of the World are also anticipated to be $307 million. It reported revenues of $314 million in the year-ago quarter.

Going forward, the company expects higher steel prices, high freight and other costs, softer volumes for water heaters and others to adversely impact its results. As a matter of fact, for 2018, the company projects commercial water heater industry volumes to decline about 5% year over year.

In addition, it expects unfavorable movement in Chinese currency to have an adverse $12 million impact on revenues in the fourth quarter. Based on weaker-than-expected water heater sales in the United States and China, the company has lowered guidance for 2018. A.O. Smith expects adjusted earnings between $2.57 and $2.60, down from the previous estimation of $2.59-$2.63.

Earnings Whispers

Our proven model provides some idea on the stocks that are about to release earnings results. Per the model, a stock needs to have a combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The case with A.O. Smith is given below.

Earnings ESP: It has an Earnings ESP of 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 71 cents.

Zacks Rank: The company carries a Zacks Rank #3, which increases the predictive power of the ESP. However, its ESP of 0.00% makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies in the Zacks Industrial Products sector that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Emerson Electric Co. (EMR - Free Report) has an Earnings ESP of +0.84% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Plug Power, Inc. (PLUG - Free Report) has an Earnings ESP of +23.91% and a Zacks Rank #3.

Dover Corporation (DOV - Free Report) has an Earnings ESP of +0.93% and a Zacks Rank #3.

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