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Why Is A.O. Smith (AOS) Down 0.8% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for A.O. Smith (AOS). Shares have lost about 0.8% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is A.O. Smith due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

A. O. Smith Q2 Earnings and Revenues Miss, Down Y/Y

A. O. Smith reported disappointing second-quarter 2019 results wherein both earnings and revenues lagged estimates.

The company’s adjusted earnings were 61 cents per share, missing the Zacks Consensus Estimate of 64 cents. Also, the bottom line declined from the year-ago figure of 66 cents.

Inside the Headlines

The company’s sales decreased 8.1% year over year to $765.4 million. The decline was primarily attributable to fall of sales in China and in North America. Also, the figure missed the Zacks Consensus Estimate of $814 million.

A.O. Smith’s sales in North America (comprising U.S. and Canadian water heaters and boilers) decreased 2% year over year to $524 million. Lower sales volumes of residential water heater products proved detrimental for the segment.

Segmental operating earnings fell 2% year over year to $122.9 million. The decline was primarily attributable to lower sales and higher steel and other costs, partially offset by the company’s pricing actions.

Quarterly sales in Rest of the World (including China, India and Europe) were down 19% year over year to $249.1 million. The decline was primarily attributable to fall in sales of water heaters and air purifiers, particularly in China.

Operating earnings at the segment declined 35% year over year to $22.4 million in the quarter. Lower sales in China and increase in currency translation proved detrimental to the segment’s income.

Share Repurchases

In first six months of 2019, A.O. Smith repurchased around 2.8 million shares for $132.6 million. At the end of the quarter, the company had approximately 6.3 million shares remaining under the existing discretionary repurchase authority.

Liquidity & Cash Flow

On Jun 30, 2019, A.O. Smith’s cash and cash equivalents totaled $281.6 million compared with $259.7 million as of Dec 31, 2018.

At the end of the reported quarter, long-term debt was $351.8 million compared with $221.8 million as of Dec 31, 2018.

Guidance

Concurrent with second-quarter results, the company revised guidance for 2019. It expects adjusted earnings to lie in the range of $2.35-$2.41 per share compared with the previous estimation of $2.69-$2.75.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -20.46% due to these changes.

VGM Scores

At this time, A.O. Smith has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise A.O. Smith has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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