Reasons Why Investors Should Avoid A. O. Smith (AOS) Stock Now
A. O. Smith Corporation AOS seems to have lost its sheen to weakness in international operations, especially that in China, high expenses and issues related to international operations, among others. The manufacturer of commercial and residential water heating equipment, and water treatment products currently carry a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company belongs to the Zacks Manufacturing – Electronics industry, currently at the bottom 10% (with the rank of 229) of more than 250 Zacks industries. We believe that the industry is suffering from adverse impacts of global uncertainties, unfavorable movements in foreign currencies and softness in the housing market in the United States. Cost escalation due to tariff-related woes and commodity inflation are other concerns.
It is worth mentioning here that the company reported weaker-than-expected results for second-quarter 2019, with earnings lagging estimates by 4.69%. Also, in the first quarter of 2019, the company lagged estimates by 10.17%.
A. O. Smith’s shares have lost nearly 3.6% in the past six months compared with the industry’s growth of 0.3% and the S&P 500’s improvement of 4.8%. Also, the company’s performance was worse than the Zacks Industrial Products sector’s decline of 1.5%.
It is worth mentioning here that A. O. Smith’s stock is currently overvalued compared with the industry, using a P/E (TTM) valuation method. The stock’s current multiple is at 20.18x, higher than the industry’s current multiple of 17.19x and the industry’s six-month highest level of 17.50x.
The company’s earnings estimates have been lowered in the past 60 days, reflecting bearish sentiments. The Zacks Consensus Estimate for its earnings is pegged at $2.38 for 2019 and $2.69 for 2020, reflecting declines of 10.9% and 7.2% from the respective 60-day-ago figures.
A. O. Smith Corporation Price and Consensus
A. O. Smith Corporation price-consensus-chart | A. O. Smith Corporation Quote
Headwinds Creating Trouble for A. O. Smith
Top-Line Weakness: The company believes that market conditions will be difficult in China in 2019. Soft sales of water treatment products, water heaters and air purifiers in the country will adversely impact its results. In local currency term, A. O. Smith believes that revenues in China will fall 16-17% year over year in 2019.
The Zacks Consensus Estimate for its revenues is currently pegged at $3.12 billion, suggesting a decline of 2.26% from the year-ago reported figure.
Cost-Related Woes: Steel is one of the key raw materials for A. O. Smith, and hence, it is exposed to risks arising from volatility in its prices. This apart, high expenses on innovation and quality improvement as well as on boosting technical expertise put pressure on the company’s resources.
For the Rest of World segment, it predicts margin to be approximately 6% in 2019, whereas it was 12.7% in 2018.
Forex Woes: Geographical diversification, with significant presence in India and China, has exposed A. O. Smith to headwinds, arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Notably, weakness in China currency lowered the company’s sales by roughly $16 million in second-quarter 2019. For the year, it believes that the persistence of this weakness will adversely influence sales by 3%.
A. O. Smith’s Performance Versus Three Peers
The company has underperformed three industry peers in the past six months. Three such stocks are Rexnord Corporation RXN, Plug Power, Inc. PLUG and ESCO Technologies Inc. ESE, with respective six-month gains of 5%, 10.4% and 17.1%.
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