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A. O. Smith Hurt by Weak Market in China & Higher Costs

Zacks Equity Research

On Nov 6, we issued an updated research report on A. O. Smith Corporation AOS.

In the past six months, this Zacks Rank #4 (Sell) stock has yielded a return of 1% compared with the industry’s growth of 8.7%.

Existing Scenario

Weakness in China on account of lower consumer demand remains a major concern for A. O. Smith. The company expects China sales to decline 19% (in local currency) for 2019, higher than the 16-17% range predicted earlier. In addition, the company is experiencing weakness in the U.S. residential water heater industry, which might adversely impact its sales.

Although A. O. Smith’s expansion initiatives hold good for long-term growth, the high capital expenditure incurred will negatively impact its short-term liquidity. Also, for 2019, the company’s corporate expenses are likely to be approximately $46 million. High corporate expenses, if not checked, might put pressure on its profitability in the near term.

Moreover, given the company’s extensive presence in Asian countries like China and India, its operations are subject to various risks like foreign currency exchange rate, interest rates fluctuations and hyperinflation. In the second and third quarter, weakness in China’s currency adversely impacted sales by about $16 million and $6 million, respectively. For 2019, A. O. Smith expects unfavorable movement in China’s currency to have an adverse impact on its revenues.

Analysts have become increasingly bearish on the company over the past seven days. Consequently, the Zacks Consensus Estimate for 2019 and 2020 earnings has trended down from $2.32 to $2.29, and from $2.60 to $2.58, respectively.

Key Picks

Some better-ranked stocks from the same space are AZZ Inc. AZZ, Plug Power, Inc. PLUG and Energous Corporation WATT. All these companies carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AZZ pulled off average positive surprise of 2.12% in the last four quarters.

Plug Power’s earnings surprise in the last reported quarter was positive 20%.

Energous came up with average earnings beat of 9.52% in the preceding four quarters.

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