A.O. Smith (AOS) Keeps Earnings Beat String Alive In Q1, Grows Y/Y

A. O. Smith Corporation (NYSE:AOS) reported first-quarter 2017 earnings per share of 50 cents. The company comfortably beat the Zacks Consensus Estimate of 47 cents by 6.4%, thus maintaining its earnings beat streak for the twenty-second straight quarter.

The earnings figure also improved 22% from the year-ago tally of 41 cents. The bottom-line improvement mainly came on the back of robust sales growth. Excellent top-line growth proved conducive to the bottom-line performance.

Inside the Headlines

Net sales in the quarter were up an impressive 16.2% year over year to $740.0 million. It also topped the Zacks Consensus Estimate of $700 million. A thriving water heater industry in the U.S. as well as robust consumer product demand in China fuelled 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 15% year over year to $487.3 million. Higher volumes of residential and commercial water heaters in the U.S. and Canada proved conducive to the sales performance of the region. In addition, the previously completed acquisition of residential water treatment company, Aquasana, contributed $10.3 million to revenues, thus supplementing the segment’s growth.

Segmental operating earnings rose 13.4% year over year to $104.2 million due to increased volumes of water heaters and higher prices. However, operating margin contracted 30 bps to 21.4% on a year-over-year basis. Lower operating margin of the acquired Aquasana business resulted in the decline.

Quarterly sales at the Rest of the World segment (China, India and Europe) rose 19.4% year over year to $259.5 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 27%, excluding impacts of the U.S. dollar). While water treatment sales in China grew over 50%, air purification sales rose over 80% year over year.

Operating earnings at the segment surged 32% year over year to $32.5 million in the quarter. Excellent sales in China more than offset multiple headwinds, including higher selling and advertising costs and currency headwinds. Operating margin advanced 10 bps to 12.5% year over year.

Share Repurchases

During first-quarter 2017, A.O. Smith repurchased around 606,850 common shares for $30.1 million. At the end of the first quarter, the company has approximately 4.3 million shares remaining under the existing discretionary repurchase.

Liquidity & Cash Flow

Exiting the quarter on Mar 31, 2017, A.O. Smith’s cash and cash equivalents were $293.4 million, compared with $330.4 million at the end of Dec 31, 2016.

At the end of the quarter, long-term debt was $362.2 million, compared with $316.4 million at the end of Dec 31, 2016.

Guidance

Concurrent with its first-quarter results, the company hiked its full-year earnings guidance by 3 cents per share. A.O. Smith now expects 2017 earnings to lie in the range of $2.03–$2.09 per share, compared to the earlier guided range of $1.98–$2.08. The upward guidance revision is primarily attributable to outstanding top and bottom-line performances in the reported quarter. For full-year 2017, the company expects revenues to grow in the range of 9–10%.

Our Take

A.O. Smith’s consistent top and bottom-line beats over the past several quarters highlight the company’s underlying strength. We believe stellar growth 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 residential and commercial boiler markets are likely to boost growth.

This apart, the Zacks Rank #2 (Buy) company’s solid financial health, strategic capital expenditures to fortify market position and overall positive trends bode well for long-term growth.

Other Stocks to Consider

Some other stocks in the broader sector include Donaldson Company, Inc. (NYSE:DCI) , EnerSys (NYSE:ENS) and The Middleby Corp. (NASDAQ:MIDD) . While Donaldson sports a Zacks Rank #1 (Strong Buy), EnerSys and Middleby carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

With three beats over the trailing four quarters, Donaldson has a positive average earnings surprise of 5.9%.

EnerSys surpassed earnings estimates each time in the past four quarters, with an average positive beat of 4.4%.

Middleby Corporation beat earnings in each of the trailing four quarters, resulting in an average surprise of 14.1%.

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