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A.O. Smith's (AOS) Q3 Earnings Beat on Strong Sales Momentum

A. O. Smith Corporation AOS reported third-quarter 2017 earnings per share of 54 cents, ahead of the Zacks Consensus Estimate of 53 cents, thereby resuming its earnings beat streak of 23 straight quarters, which it broke just once as it reported in-line earnings last quarter.

The earnings figure improved 15% from the year-ago tally of 47 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 9.7% year over year to $749.9 million. It also topped the Zacks Consensus Estimate of $742 million. 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.

Talking about segments, A.O. Smith’s sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) grew 7.8% year over year to $486 million. Higher volumes of residential water heaters, strong sales of boilers, and pricing actions related to elevated steel costs proved conducive to the sales performance of this region. Lochinvar-branded products charted 17% growth in the quarter. In addition, Hague products and Aquasana contributed $8 million to revenues, thus supplementing the segment’s growth.

Segmental operating earnings rose 9.8% year over year to $110.3 million. The segment’s profit was favorably impacted by higher sales of residential water heaters and boilers. However, the benefit was partially offset by flared up steel costs. Consequently, operating margin expanded 40 basis points (bps) to 22.7% on a year-over-year basis.

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

Quarterly sales at the Rest of the World segment (including China, India and Europe) rose 12.4% year over year to $270.1 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 13%, excluding impacts of the U.S. dollar).

Operating earnings at the segment climbed 8.7% year over year to $33.8 million in the quarter. The favorable impact of excellent sales in China was partially offset by escalating steel and installation costs, as well as selling and administrative costs. Operating margin contracted 40 bps to 12.5% year over year.

Share Repurchases

During the first nine months of 2017, A.O. Smith repurchased around 1.9 million common shares for $103 million. At the end of the quarter, the company has approximately 3 million shares remaining under the existing discretionary repurchase.

Liquidity & Cash Flow

Exiting the quarter on Sep 30, 2017, A.O. Smith’s cash and cash equivalents were $321.9 million compared with $269.3 million a year back. Cash generated from operations during this nine-month period came in at $150.2 million, way lower than $263.6 million recorded in the comparable period last year, as higher earnings were more than offset by higher outlays for working capital.

At the end of the reported quarter, long-term debt was $449.7 million compared with $316.4 million witnessed at the end of Dec 31, 2016.

Guidance

Concurrent with the third-quarter results, the company raised its full-year earnings guidance for the third time. For full-year 2017, the company projects revenues to be up in the range of 11-12% now, as opposed to the earlier guided range of 10-11%.

Further, A.O. Smith now anticipates 2017 earnings to lie in the range of $2.12-$2.14 per share compared to the earlier guided range of $2.07-$2.11. The upward guidance revision is primarily attributable to outstanding performance year to date, backed by solid demand and sales momentum.

Our Take

A.O. Smith’s continued 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, this Zacks Rank #2 (Buy) company’s sound 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 stocks in the same space include Barnes Group Inc. B, IDEX Corporation IEX and Altra Industrial Motion Corp. AIMC. While Barnes Group sports a Zacks Rank of 1 (Strong Buy), IDEX and Altra Industrial carry the same Zacks Rank as A.O. Smith. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 11.6%.

IDEX Corporation also has a decent earnings surprise history, with an average beat of 4.4% over the trailing four quarters, beating estimates each time.

Altra Industrial generated four strong beats during the same time frame, for an average positive surprise of 17.3%.

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