A.O. Smith (AOS) Tops Q4 Earnings, Posts Record 2017 Sales

A. O. Smith Corporation (NYSE:AOS) reported fourth-quarter 2017 earnings per share of 60 cents, ahead of the Zacks Consensus Estimate of 56 cents, thereby continuing its earnings beat streak of 24 straight quarters, which the company broke just once as it reported in-line earnings last quarter.

The earnings figure improved 27.7% from the year-ago tally of 47 cents. The bottom-line improvement mainly came on the back of robust sales growth.

For 2017, the company generated adjusted net earnings of $378.3 million or $2.17 per share, up 16% from the prior-year figure.

Inside the Headlines

Net sales in the quarter were up an impressive 10.1% year over year to $768.6 million. The figure also topped the Zacks Consensus Estimate of $767.1 million by a whisker. 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.

For the full year, the company posted record sales of $3 billion, up almost 12% from the 2016 tally.

Coming back to the fourth quarter, A.O. Smith’s sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) grew 6% year over year to $460.8 million. Higher volumes of commercial water heaters, strong sales of boilers, and pricing actions related to elevated steel costs proved conducive to the sales performance of this region. Water treatment products contributed about $9 million to revenues, thus supplementing the segment’s growth.

Segmental operating earnings rose an impressive 17% year over year to $104.9 million. The segment’s profit was favorably influenced by higher sales of commercial water heaters and boilers and pricing actions. However, the benefit was partially offset by flared up steel costs. Consequently, operating margin expanded 230 basis points (bps) to 22.8% 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) were up 17% year over year to $313.8 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 India (up 40%). Also, favorable pricing actions added to the top line.

Operating earnings at the segment climbed a whopping 33% year over year to $50.8 million in the quarter. The favorable impact of excellent sales in India and China, along with favorable pricing actions, was partially offset by escalating steel and installation cost. Operating margin advanced 200 bps to 16.2% year over year.

Share Repurchases

During 2017, A.O. Smith repurchased around 2.5 million common shares for $139.1 million. At the end of the year, the company has approximately 2.4 million shares remaining under the existing discretionary repurchase authority.

Liquidity & Cash Flow

Exiting the year on Dec 31, 2017, A.O. Smith’s cash and cash equivalents totaled $346.6 million compared with $330.4 million a year back. Cash generated from operations during the year came in at $326.4 million, lower than $446.6 million recorded 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 $402.9 million compared with $316.4 million witnessed at the end of Dec 31, 2016.

Also, earlier this month, A.O. Smith announced a 29% hike in its quarterly cash dividend. The new dividend of 18 cents per share will be paid on Feb 15 to shareholders on record as of Jan 31.This translates to a dividend of 72 cents per share on an annualized basis, and marks the 13th consecutive year in which the company has increased its quarterly cash dividend.

Guidance

Concurrent with the fourth-quarter results, the company released optimistic guidance for 2018, and expects adjusted earnings to lie in the range of $2.50-2.58 per share. The mid-point of the range reflects impressive year-over-year growth of 17%. The buoyant guidance reflects the company’s robust growth momentum, backed by solid demand.

Our Take

A.O. Smith wrapped up 2017 with solid momentum, with double-digit sales growth driven by continued strong demand for its consumer products in China, and positive end markets for the company’s water heaters and boilers in North America. 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 in the near future. Also, dominant foothold in the North American water-heater market, along with thriving prospects in the residential and commercial boiler markets, is likely to stoke growth.

However, over the past few quarters, this Zacks Rank #4 (Sell) company’s SG&A expenses in China (including elevated steel costs and higher fees paid to installers) have been quite high, which is creating pressure on the company’s operating margins. Furthermore, transition of the Chinese economy to a consumer-driven one might impact A.O. Smith’s sales in the region.

Stocks to Consider

Some better-ranked stocks in the same space include Illinois Tool Works Inc. (NYSE:ITW) , Parker-Hannifin Corporation (NYSE:PH) and RBC Bearings Incorporated (NASDAQ:ROLL) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Illinois Tool Works has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 4.2%.

Parker-Hannifin also has an impressive earnings surprise history, with an average beat of 16.6% over the preceding four quarters, beating estimates all through.

RBC Bearings generated three beats during the same time frame, for an average positive surprise of 3.8%.

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