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Why Is A.O. Smith (AOS) Down 3.3% 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 3.3% in that time frame, underperforming 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 Q3 Earnings Miss Estimates, Decline Y/Y

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

The company’s adjusted earnings were 53 cents per share, missing the Zacks Consensus Estimate of 54 cents. Also, the bottom line declined from the year-ago figure of 61 cents.

Inside the Headlines

The company’s sales decreased 3.4% year over year to $728.2 million. The decline was primarily attributable to fall of sales in China. Also, the figure missed the Zacks Consensus Estimate of $757 million.

A.O. Smith’s sales in North America (comprising U.S. and Canadian water heaters and boilers) increased 5.7% year over year to $514.6 million. Higher sales volumes of water heater and boiler products in the United States proved beneficial for the segment.

Segmental operating earnings jumped 15% year over year to $121.6 million. The improvement was primarily driven by higher sales volumes of water heater and boiler, lower steel costs and incremental profits from acquired Water-Right business.

Quarterly sales in Rest of the World (including China, India and Europe) were down 20% year over year to $220.3 million. The decline was primarily attributable to soft consumer demand and above normal channel inventory levels, particularly in China.

Operating earnings at the segment significantly declined to $4.1 million from $39.1 million in the year-ago quarter. Lower sales in China proved detrimental to the segment’s income.

Share Repurchases

In first nine months of 2019, A.O. Smith repurchased around 4.9 million shares for $230 million. At the end of the quarter, the company had approximately 4.1 million shares remaining under the existing discretionary repurchase authority.

Liquidity & Cash Flow

On Sep 30, 2019, A.O. Smith’s cash and cash equivalents totaled $219.4 million compared with $259.7 million as of Dec 31, 2018.

At the end of the reported quarter, long-term debt was $312.4 million compared with $221.4 million as of Dec 31, 2018.

Guidance

For 2019, A.O. Smith expects adjusted earnings to lie in the range of $2.25-$2.28 per share compared with the previous estimation of $2.35-$2.41.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -11.6% due to these changes.

VGM Scores

Currently, A.O. Smith has a nice Growth Score of B, a grade with the same score on the momentum front. 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 these revisions 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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