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Thursday, 04/05/2018 9:52:34 AM

Thursday, April 05, 2018 9:52:34 AM

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A.O. Smith Should Outperform Peers, Goldman Sachs Says In Upgrade

Pricing power, "stable" water heater volumes in the U.S., cash flow generation and growth opportunities in the U.S., China and India make A. O. Smith Corp a defensive stock, Goldman Sachs said in a Wednesday upgrade.

The Analyst

Analyst Samuel Eisner upgraded shares of A.O. Smith from Neutral to Buy and increased the price target from $64 to $73, suggesting 16-percent potential upside.

The Thesis

A.O. Smith's water heater operations alone possesses volume visibility, pricing power and strong balance sheets, which are important criteria for alpha generation in an environment of lumpiness in macro sentiment and margins, Eisner said in a Wednesday note.

Every 1 point of replacement volume will fetch the company 1 cent in earnings per share, the analyst said.

Vsibility on continued double-digit rest-of-the-world growth is high in light of consumer sentiment and low water heater penetration, Eisner said.

Eisner said he expects rest-of-the-world revenues to grow at a CAGR of 17 percent through 2020 alongside improving margins.

A.O. Smith has the strongest balance sheet in Goldman's coverage universe, providing it with capital optionality that could drive upside, the analyst said. Goldman forecast 24-39 percent upside to its 2019 EBITDA estimate from capital deployment alone.

"We see NA water treatment as an attractive area for M&A," Eisner said.

Goldman increased its 2019 earnings per share forecast from $2.90 to $2.96, citing the solid rest-of-the-world growth and increasing margins alongside the buildout of North American water treatment.

The Price Action

A.O. Smith shares are up about 22 percent over the past year.

The stock was up 0.41 percent at the time of publication Wednesday.
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