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Why Is A.O. Smith (AOS) Down 10.6% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for A.O. Smith (AOS). Shares have lost about 10.6% 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 the most recent earnings report in order to get a better handle on the important drivers.

A. O. Smith Q4 Earnings and Revenues Miss, Down Y/Y

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

The company’s adjusted earnings were 56 cents per share, missing the Zacks Consensus Estimate of 60 cents. Also, the bottom line declined from the year-ago figure of 74 cents.

The company reported 2019 adjusted earnings of $2.22, a decrease of about 14% from the prior year.

Inside the Headlines

The company’s fourth-quarter net sales decreased 7.6% year over year to $750.9 million. The decline was primarily attributable to lower sales in China. Also, the figure missed the Zacks Consensus Estimate of $777 million.

In 2019, the company reported net sales of $2,992.7 million, down 6.1% from the year-ago number.

A.O. Smith’s sales in North America (comprising U.S. and Canadian water heaters and boilers) inched up 0.2% year over year to $523.1 million. The segment’s results benefited from higher sales volumes of water treatment products and contribution from its Water-Right acquisition, partially offset by lower sales volume of boiler products.

Segmental operating earnings were relatively flat year over year at $128.4 million. Benefits of lower steel costs were offset by lower boiler volumes.

Quarterly sales in Rest of World (including China, India and Europe) fell 21.3% year over year to $234.3 million. The decline was primarily attributable to soft consumer demand and above normal channel inventory levels, as well as a higher mix of mid-price products.

Operating earnings at the segment significantly declined to $1.5 million from $39.5 million in the year-ago quarter. Lower sales in China proved detrimental to the segment’s income.

Margins Details

In the quarter, A.O. Smith’s cost of goods sold declined 4.1% year over year to $455.9 million. It represented 60.7% of net sales. Selling, general and administrative expenses were $179.9 million, representing 24% of net sales.

Gross profit decreased 12.5% year over year to $295 million, with margin decreasing 220 basis points to 39.3%.

Share Repurchases

In 2019, A.O. Smith repurchased around 6.1 million shares for $287.7 million. At the end of the quarter, the company had approximately 3 million shares remaining under the existing discretionary repurchase authority.

Liquidity

At the end of 2019, A.O. Smith’s cash and cash equivalents totaled $374 million compared with $259.7 million as of Dec 31, 2018. In 2019, the company generated net cash of $456.2 million from operating activities, reflecting increase of 1.6% year over year.

At the end of the reported quarter, long-term debt was $277.2 million compared with $221.4 million as of Dec 31, 2018.

Guidance

Concurrent with fourth-quarter results, the company issued guidance for 2020. It expects adjusted earnings to lie in the range of $2.40-2.50 per share. The mid-point reflects impressive year-over-year growth of 10%. In addition, the company expects to register revenue growth in the band of 4.5-5.5% for 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -11.43% due to these changes.

VGM Scores

Currently, A.O. Smith has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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. Notably, A.O. Smith has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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