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A. O. Smith Buys William R. Hague, Boosts Water Footprint

Zacks Equity Research

Manufacturer of residential and commercial water heating equipment, A. O. Smith Corporation AOS, recently announced the buyout of William R. Hague, Inc. (Hague Quality Water International). The acquisition will enable A. O. Smith to further expand its global water treatment platform.

The transaction, worth $44.5 million in cash, includes the potential earn out of up to $2 million based on revenue growth over the next couple of years.

The Acquiree

Based in Ohio, Hague is the manufacturer of a wide-range of water softener products. Featuring innovative multi-compartment and compact tank design, Hague’s water softener products are sold under Hague, WaterBoss, and WaterMax brands.

Transaction Rationale

The acquisition is likely to augment A. O. Smith’s residential and commercial water treatment capabilities and product offerings.

The acquisition is in sync with the A. O. Smith’s strategy to expand its global water treatment platform. Hague's complementary capabilities and patented water softener products round up A. O. Smith's residential water treatment portfolio nicely. The company has already started offering Hague-manufactured water softeners in China through major retailers like Suning and Gome, apart from its own stores.

Further, Hague’s strong water quality dealer network will enable A. O. Smith to expand its distribution channel in the United States and abroad.

Our Take 

In the past six months, shares of this Zacks Rank #3 (Hold) company returned 11.8%, outperforming the industry’s average decline of 0.1%. Going forward, A.O. Smith remains bullish about its prospects in key markets, and has several robust growth drivers in place. It expects the U.S. residential water heater volumes to shoot up by approximately 300,000 units on the back of sturdy demand. Impressive demand for U.S. commercial heaters is also expected to support growth.

The company has been selectively acquiring assets to boost its water treatment capabilities. During third-quarter 2016, the company acquired residential water treatment company Aquasana, which has been adding to the company’s strength. The Aquasana buyout has helped A.O. Smith bring its Asia-based reverse osmosis water treatment platform into the United States.

Aquasana's carbon-based products have also provided the company a chance to cross-sell water treatment products in China. Such diligent expansion strategies will help the company pave the way for higher brand recognition and top-line growth.

However, over the past few quarters, A.O. Smith’s administrative expenses in China have been quite high, adding to its overall operating expenses. Furthermore, transition of the Chinese economy to a consumer driven one has resulted in a significant slowdown that might impact A.O. Smith’s sales in the region.

Furthermore, although A.O. Smith’s expansion initiatives hold good for long-term growth, the high capital expenditure incurred negatively impacts its short-term earnings. These actions are expected to put pressure on the company’s profitability in the near term.

Stocks to Consider

Some better-ranked stocks from the same space are AGCO Corporation AGCO, Altra Industrial Motion Corp. AIMC and Barnes Group, Inc. B. While AGCO and Altra Industrial Motion sport a Zacks Rank #1 (Strong Buy), Barnes Group carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has an average positive earnings surprise of 39.7% for the trailing four quarters, having surpassed estimates all through.

Altra Industrial Motion managed to beat estimates every time in the trailing four quarters, at an average earnings surprise of 16.6%.

Barnes Group has an average positive earnings surprise of 11.6% for the trailing four quarters, having surpassed estimates every time.

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