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A. O. Smith (AOS) Gains From Business Strength, Risks Persist
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A. O. Smith Corporation (AOS - Free Report) is poised to benefit from the robust demand for boilers and water treatment products, supported by its strong retail and direct-to-consumer sales channel. Growth in demand across all major product categories in India and China, its product-development initiatives, production efficiency and strong price management capabilities are likely to support its performance in the quarters ahead.
For 2022, it expects sales from its boiler and water treatment businesses in North America to grow 10% and 13-14%, respectively, on a year-over-year basis. For the year, its total revenues are likely to grow 16-18%.
The company’s acquisition of Master Water Conditioning Corporation (July 2021) strengthened its water treatment business in North America. Also, its buyout of Giant Factories (October 2021) has been expanding its commercial and water heater offerings. In 2021, the Giant Factories buyout added $22.9 million to sales of the North America segment. AOS anticipates the buyout to be accretive to its earnings per share in 2022.
A. O. Smith’s ability to generate strong cash flows allows it to effectively deploy capital for repurchasing shares and paying out dividends. Exiting 2021, its cash, cash equivalents and marketable securities were $631.4 million. In 2021, its cash flow from operations totaled $641.1 million, reflecting an increase of 14.1% year over year. In the year, it used $170.1 million and $366.5 million for paying out dividends and repurchasing shares, respectively. In October 2021, it hiked the quarterly dividend rate by 8%.
However, escalating costs and expenses remain major concerns for the company. In fourth-quarter 2021, its cost of sales increased 24.4%, and selling, general and administrative expenses rose 7.6% on a year-over-year basis. Also, high capital expenditure might affect its short-term liquidity. For 2022, it expects capital expenditure of $75-$80 million.
Raw-material inflation, higher logistic costs and a shortage of labor might continue to affect the company’s performance in the near term. In the fourth quarter, its gross profit margin fell 260 basis points year over year, owing to higher steel and other material costs.
Image Source: Zacks Investment Research
The Zacks Rank #3 (Hold) company’s shares have gained 9.2% compared with 2.9% growth recorded by the industry in the past six months.
Key Picks
Some better-ranked stocks from the same space are discussed below.
In the past 30 days, Franklin Electric’s earnings estimates have been stable for 2022. FELE’s shares have gained 5.1% in the past six months.
Zurn Water Solutions Corporation (ZWS - Free Report) presently carries a Zacks Rank #2. Its earnings surprise in the last four quarters was 62.43%, on average.
In the past 30 days, Zurn’s earnings estimates have been unchanged for 2022. ZWS’s shares have lost 45.1% in the past six months.
Regal Rexnord Corporation (RRX - Free Report) presently carries a Zacks Rank #2. Its earnings surprise in the last four quarters was 7.39%, on average.
Its earnings estimates have been stable for 2022 in the past 30 days. RRX’s shares have gained 2.1% in the past six months.
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A. O. Smith (AOS) Gains From Business Strength, Risks Persist
A. O. Smith Corporation (AOS - Free Report) is poised to benefit from the robust demand for boilers and water treatment products, supported by its strong retail and direct-to-consumer sales channel. Growth in demand across all major product categories in India and China, its product-development initiatives, production efficiency and strong price management capabilities are likely to support its performance in the quarters ahead.
For 2022, it expects sales from its boiler and water treatment businesses in North America to grow 10% and 13-14%, respectively, on a year-over-year basis. For the year, its total revenues are likely to grow 16-18%.
The company’s acquisition of Master Water Conditioning Corporation (July 2021) strengthened its water treatment business in North America. Also, its buyout of Giant Factories (October 2021) has been expanding its commercial and water heater offerings. In 2021, the Giant Factories buyout added $22.9 million to sales of the North America segment. AOS anticipates the buyout to be accretive to its earnings per share in 2022.
A. O. Smith’s ability to generate strong cash flows allows it to effectively deploy capital for repurchasing shares and paying out dividends. Exiting 2021, its cash, cash equivalents and marketable securities were $631.4 million. In 2021, its cash flow from operations totaled $641.1 million, reflecting an increase of 14.1% year over year. In the year, it used $170.1 million and $366.5 million for paying out dividends and repurchasing shares, respectively. In October 2021, it hiked the quarterly dividend rate by 8%.
However, escalating costs and expenses remain major concerns for the company. In fourth-quarter 2021, its cost of sales increased 24.4%, and selling, general and administrative expenses rose 7.6% on a year-over-year basis. Also, high capital expenditure might affect its short-term liquidity. For 2022, it expects capital expenditure of $75-$80 million.
Raw-material inflation, higher logistic costs and a shortage of labor might continue to affect the company’s performance in the near term. In the fourth quarter, its gross profit margin fell 260 basis points year over year, owing to higher steel and other material costs.
Image Source: Zacks Investment Research
The Zacks Rank #3 (Hold) company’s shares have gained 9.2% compared with 2.9% growth recorded by the industry in the past six months.
Key Picks
Some better-ranked stocks from the same space are discussed below.
Franklin Electric Co., Inc. (FELE - Free Report) presently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Its earnings surprise in the last four quarters was 17.4%, on average.
In the past 30 days, Franklin Electric’s earnings estimates have been stable for 2022. FELE’s shares have gained 5.1% in the past six months.
Zurn Water Solutions Corporation (ZWS - Free Report) presently carries a Zacks Rank #2. Its earnings surprise in the last four quarters was 62.43%, on average.
In the past 30 days, Zurn’s earnings estimates have been unchanged for 2022. ZWS’s shares have lost 45.1% in the past six months.
Regal Rexnord Corporation (RRX - Free Report) presently carries a Zacks Rank #2. Its earnings surprise in the last four quarters was 7.39%, on average.
Its earnings estimates have been stable for 2022 in the past 30 days. RRX’s shares have gained 2.1% in the past six months.