U.S. Markets open in 2 hrs 16 mins

Strong Buy on AO Smith

Zacks Equity Research

Zacks Investment Research upgraded AO Smith Corp. (AOS) to a Zacks Rank #1 (Strong Buy) on May 21, 2013.

Why the Upgrade?

A series of events taking place in quick succession in Apr 2013 helped the shares of AO Smith rise 11.5% since the beginning of the month till date. Upward revision in earnings estimates has been witnessed subsequent to the company’s release of its first quarter 2013 financial results on Apr 23, 2013.

AO Smith posted adjusted earnings per share of 96 cents that far exceeded the Zacks Consensus Estimate of 38 cents. Revenue in the first quarter grew 8.7% year over year as sales from North American operations rose 7.2% while from Rest of the World increased by 11.4%.

Talking of expenses and margins, cost of sales as a percentage of revenue fell 342 basis points while gross margin went up by the same magnitude in the quarter. Operating margin came in at 15.2% as against 12.2% in the year-ago quarter.

Management of AO Smith provided an encouraging outlook for 2013. The company’s businesses, especially its replacement water heater business in North America is expected to flourish. Housing market recovery is likely to boost sales in the U.S. while expansion in global markets is expected to add to the growth momentum. Adjusted earnings per share would be within the $3.40-$3.56 range as against $3.25-$3.45 expected earlier.

Prior to the earnings release, AO Smith in April declared a 20% increase in its quarterly dividend rate that settled at 24 cents per share and a two-for-one stock split. Also, the company announced the closure of manufacturing operations at its Fergus, Ontario, residential water heater facility. This measure was undertaken to bring residential and light commercial water heating operations under one roof and to increase the competitiveness of the operation.

Solid upbeat results posted by AO Smith in its trailing four quarters have a positive average of 13.3%. Outlook remains bright for the company as the Zacks Consensus Estimate for AO Smith went up in the last 30 days. For 2013, the estimate has increased by 4.7% to $1.80 and by 2.0% to $2.06 for 2014.

Other Stocks to Consider

AO Smith Corp. is a $3.7 billion industrial electrical equipment maker. Other stocks that are worth a look in the industry are ABB Ltd. (ABB), Capstone Turbine Corp. (CPST) and Emerson Electric Co. (EMR).

Read the Full Research Report on ABB

Read the Full Research Report on CPST

Read the Full Research Report on EMR

Read the Full Research Report on AOS

Zacks Investment Research

More From Zacks.com