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AO Smith -- >>> A.O. Smith: This Water Heater Manufacturer Is Sizzling



Aug 23 2013

by: Fusion Research

about: AOS, includes: BDC, OSIS


http://seekingalpha.com/article/1654592-buy-a-o-smith-this-water-heater-manufacturer-is-sizzling?source=yahoo



A.O. Smith Corp (AOS) is a leader in providing gas, electric and oil, water heaters, water treatment products, and boilers for both the residential and commercial markets. The company also provides copper-tube boilers and expansion tanks, commercial solar systems and swimming pool and spa heaters.

It reports revenue in two segments, North America and the rest of the world. The North American segment largely consists of sales in United States and Canada. The rest of the world segment is responsible for 24% of sales, primarily driven by China and India. Strong growth in these business segments guided A.O. Smith to prosper in terms of revenue.


Normally companies that record impressive growth for a number of quarters face a situation where there is stagnation in the markets, and the growth trajectory tends to fall flat. There are a number of reasons that cause the downfall, reduction in demand for the products is one of them. In contrast to this, A.O. Smith has been observing quarter-over-quarter growth in the past couple of years mainly driven by rising demand for its products. Also, it has posted compelling recent quarter results.

Solid Earnings

Recently, on July 24, 2013 A.O. Smith announced compelling second quarter results with a 13% year-over-year revenue increase to $549.1 million. Solid sales in North American and Chinese markets were the primary reason the company observed this growth. The North American market's second quarter sales increased around 6% year-over-year to $389 million. The improved economic conditions and the recovery of the new housing market in the U. S. contributed heavily to the 6% growth. For the rest of the year, management expects that constant market acceptance of high efficiency boilers will also bring lucrative revenue generating opportunities to the water heater replacement business.

A.O. Smith experienced an impressive 35% year-over-year growth in revenue in the Chinese market to $143.6 million during the second quarter of 2013. Increased demand for its premium water heaters with higher value features and a higher priced product mix drove the rise in sales. Looking at this strong growth, the company expects sales in the Chinese market will grow an additional 18% in fiscal year 2013, which includes more than 10% growth in the second half of this year.

Considering these exciting results, AO Smith has raised its guidance range for GAAP earnings between $1.62 per share - $1.68 per share. This is in comparison to GAAP earnings of $3.00 per share - $3.16 per share disclosed during the first quarter of 2013. The EPS guidance for the second quarter is almost half of the EPS guidance announced during first quarter because of the 2-for-1 stock split plan approved by the board in April 2013. Moreover, it laid out its 2015 revenue aspirations of $2.4 billion - $2.45 billion by 2015, which consists of organic growth of 7% per year.

We believe it has the potential to achieve the desired guidance. If the company does so, it would imply a CAGR of 8.1% in revenue from $1.9 billion in 2012. The earnings aspirations from the existing businesses are now expected to be approximately $2.25 per share by 2015 versus the previously anticipated $2.15 per share. All of these aspirations are based on expectations for higher revenue due to the rise in new construction in the U.S. and 10% revenue growth of Lochinvar branded products through 2015. Lochinvar is a manufacturer of water heaters and boilers A.O. Smith acquired in 2011. Moreover, it is aggressively looking forward to pursue acquisition opportunities this year that will add value in terms of revenue and aims to have a broader product pipeline

Stock performance goes hand-in-hand

Taking into account the past year stock price performance of A.O. Smith, it has provided notable 64.66% returns to its shareholders. The constant upward movement in the stock price in the past one year is due to 13.4% year-over-year revenue growth in fiscal year 2012. The company is providing consistent performance - it posted strong numbers in the first half of this year that is allowing the stock price to rise accordingly.

AO Smith has engaged in the share repurchase, dividend distribution and stock split activities that attracted new investors. This indicates that it is using its cash flow very wisely and will guide the company to provide additional returns to its investors and attract new investors.

Going forward, we assume the growing demand for AO Smith's products in the North American and Chinese market will support it to continue to observe a regular uptick in the stock price. Additionally, it is also looking forward for potential acquisitions, which we believe could positively impact the revenue generation capacity and the upward stock price movement.



AOS Total Return Price data by YCharts

U.S. and China Pushing A.O. Smith ahead

As discussed above, A.O. Smith is currently experiencing strong demand for its products in the U.S. and Chinese market, let's find out how these markets continue will with the solid contribution in upcoming years.

· U.S.

A.O. Smith is the leading water heater manufacturer in the U.S. The demand for its products is mainly based on volatility in the U.S. housing markets. The U.S. Census Bureau and the Department of Housing and Urban Development have released new residential construction statistics for May 2013. Annual data for housing completion was 690,000, up 12.6% compared to May 2012, and the annual rate for new housing starts was 914,000, up 28.6% year-over-year.

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