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A. O. Smith (AOS) to Report Q2 Earnings: What's in the Cards?

Zacks Equity Research

A. O. Smith Corporation AOS is scheduled to report second-quarter 2019 results on Jul 30, before market open.

The company delivered average negative earnings surprise of 0.67% in the trailing four quarters, missing estimates twice. Notably, in the last reported quarter, the company posted earnings of 53 cents, which lagged the Zacks Consensus Estimate of 59 cents by 10.17%.

In the past three months, the company’s shares have lost 19.2%, wider than the industry’s decline of 4.8%.

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

Factors to Influence Q2 Results

A. O. Smith believes that higher steel prices, softer sales of water heaters and air purifiers in China will adversely impact its second-quarter profitability. Also, the company has to spend considerable resources for the development of innovative products, quality improvement of existing product and integrating advanced technological changes. This increases its selling, general and administrative expenses and contracts margins.

Although A. O. Smith’s expansion initiatives bode well for long-term growth, high capital expenditure incurred will negatively impact its short-term earnings. For instance, in first-quarter 2019, the company’s capital expenditure jumped 20.8% to $20.9 million on a year-over-year basis. In addition, corporate expenses are likely to be $49 million in 2019, primarily on account of inflation. These are expected to put pressure on the company's second-quarter profitability.

Moreover, it expects unfavorable movement in Chinese currency to have an adverse impact on revenues.

However, over the past few quarters, A. O. Smith's strong position in the defensive replacement market for U.S. water heaters and boilers has been a staple growth driver. The company’s defensive replacement market, which accounts for approximately 85% of the North American water heater and boiler volumes, has been witnessing an uptrend, thus stoking growth.

Amid this backdrop, the Zacks Consensus Estimate for revenues from A. O. Smith's North America segment for the to-be-reported quarter is currently pegged at $556 million, indicating a rise from $534 million reported a year ago. Revenues from Rest of the World are estimated to be $272 million compared with $308 million reported a year ago.

Earnings Whispers

Our proven model provides some idea on the stocks that are about to release earnings results. Per the model, a stock needs to have a combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The case with A. O. Smith is given below.

Earnings ESP: It has an Earnings ESP of 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 64 cents.

A. O. Smith Corporation Price and EPS Surprise

A. O. Smith Corporation Price and EPS Surprise

A. O. Smith Corporation price-eps-surprise | A. O. Smith Corporation Quote

Zacks Rank: The company carries a Zacks Rank #4 (Sell), which when combined with the ESP of 0.00% makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies in the Zacks Industrial Products sector 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:

Ingersoll-Rand plc IR has an Earnings ESP of +1.40% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

AptarGroup, Inc. ATR has an Earnings ESP of +0.56% and a Zacks Rank #2.

ACCO Brands Corporation ACCO has an Earnings ESP of +0.63% and a Zacks Rank #3.

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