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Will A.O. Smith (AOS) Keep Earnings Streak Alive in Q2?

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Will A.O. Smith (AOS) Keep Earnings Streak Alive in Q2?

Strong prospects of A.O. Smith's (AOS) North America and Rest of World geographic segments are expected to be conducive to its second-quarter results.

A. O. Smith Corporation AOS is scheduled to report second-quarter 2018 results on Jul 25, before the market opens.

The company pulled off an average positive earnings surprise of 3.12% in the trailing four quarters, beating estimates thrice. Notably, in the last reported quarter, the company posted earnings of 60 cents, which beat the Zacks Consensus Estimate of 58 cents by 3.45%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Over the past few quarters, A.O. Smith's strong position in the defensive replacement market has remained a staple growth driver. For 2018, the company believes that the U.S. residential water heater volumes will shoot up approximately 250,000-300,000 units on the back of new construction and expansion of replacement demand. Also, the company expects its boiler business to grow roughly 10% in the year. Further, its Lochinvar-branded products is benefiting from the transition from lower-efficiency to higher-efficiency boilers and new product introduction. This trend is likely to continue moving forward as well, driving top-line growth.

Of late, the company’s business in China is experiencing strong growth on the back of high demand for water heating and water treatment products, as well as air purification products. Notably, in first-quarter 2018, the company experienced around 13% growth in year-over-year sales in China. Also, it expects improved operations in India due to increasing scale in the water heater business. Notably, during the first quarter, the Rest of World segment's sales increased 13% year over year. Backed by price increase and lower advertising expenses, the company expects improved profitability and operating margins in the segment, going forward.

Amid this backdrop, the Zacks Consensus Estimate for revenues from A.O. Smith's North America geographic segment for the to-be-reported quarter is currently pegged at $502 million, reflecting growth of 6.6% year over year. Revenues from Rest of the World are also anticipated to be strong, with estimates standing at $315 million compared with reported revenues of $273 million in the year-ago quarter.

However, over the past few quarters, the company’s selling, general and administrative expenses in China have been quite high, adding to the company's overall operating expenses. Higher selling costs, coupled with developmental costs associated with new products, including expansion of air purification product portfolio, are driving the company's operating expenses in China.

In addition, market prices for certain raw materials used by the company, primarily steel, have been subject to volatility. Particularly, tariff imposition on imports of steel may have an adverse impact on its earnings. Also, corporate expenses are likely to be high in 2018, primarily led by the surging expenses at the higher projected spending at the company's corporate R&D center. We believe, if unchecked, rising costs and expenses can hurt its margins in the quarters ahead.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for A.O. Smith in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Earnings ESP: A.O. Smith has an Earnings ESP of -0.81%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

A. O. Smith Corporation Price and EPS Surprise


A. O. Smith Corporation Price and EPS Surprise | A. O. Smith Corporation Quote

Zacks Rank: A.O. Smith carries a Zacks Rank #3, which increases the predictive power of the ESP. However, the company’s negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Eaton Corporation, PLC ETN has an Earnings ESP of +0.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Rexnord Corporation RXN has an Earnings ESP of +3.74% and a Zacks Rank #3.

Franklin Electric Co., Inc. FELE has an Earnings ESP of +3.60% and a Zacks Rank #3.

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