By On October 23, 2024, UBS analysts upgraded A. O. Smith (NYSE: AOS) to a “Neutral” rating from a previous “Sell.”
The upgrade came as UBS saw the company more fairly valued after a period of stock underperformance compared to its peers and broader markets.
The firm raised its price target for A. O. Smith to $80 from the previous $75, reflecting a revised multiple of 18x earnings for 2025 and 2026.
UBS analyst Damian Karas cited the company’s strong balance sheet and defensive attributes as insulating factors in the face of potential economic downturns.
He also noted that the firm was incrementally optimistic about China’s government stimulus and its positive impact on A. O. Smith’s reverse osmosis water filtration business, despite a challenging consumer and housing market.
Q3 Earnings review
A. O. Smith reported its Q3 results on October 22, 2024.
The company posted a Non-GAAP EPS of $0.82, which was in line with expectations, while revenue fell short, coming in at $903 million, down 3.7% year-over-year and missing estimates by approximately $54.75 million.
Sales declined primarily due to lower volumes in China and a drop in North American water heater sales.
Notably, the company experienced a 4% decline in net sales compared to the same period last year, with net earnings falling 11% to $120.2 million.
The weaker performance in key segments like China, where sales decreased by 17% year-over-year, and North America, where water heater demand softened, contributed significantly to these results.
Business fundamentals and recent developments
From a broader perspective, A. O. Smith remains fundamentally strong with a diverse portfolio and a clear focus on sustainable growth.
The company’s North American segment showed resilience with commercial boiler and water treatment sales growing in double digits, partially offsetting lower water heater volumes.
In China, where the company faced persistent headwinds, the recent government stimulus could be a silver lining, potentially driving improvements in residential demand.
Additionally, A. O. Smith’s acquisition of Pureit from Unilever for $120 million aligns well with its strategy to expand its market share in India and South Asia.
Despite headwinds from weaker consumer demand in China and fluctuating water heater volumes in North America, A. O. Smith continues to capitalize on growth opportunities in India.
The company’s balance sheet is also a notable strength, maintaining a low leverage ratio of 5.9% and free cash flow generation of $282.5 million in the first nine months of 2024.
However, rising steel costs and weak sales in China pose risks to profitability in the short term.
Valuation insights
A. O. Smith is trading at a forward P/E ratio of approximately 20x based on FY25 EPS, slightly above its long-term average.
While UBS sees the stock’s current valuation as fair, the ongoing economic uncertainty and inconsistent growth prospects in China may limit near-term upside.
Investors have been cautious following the company’s guidance cut earlier in October, which lowered its full-year EPS outlook to a range of $3.70 to $3.85, compared to previous guidance of $3.95 to $4.10.
Having reviewed the business fundamentals and recent news, let’s delve into what the technical indicators reveal about A. O. Smith’s stock trajectory.
Trading near support
A. O. Smith’s stock has gone nowhere for almost 2 years now.
The stock has made a double top at $92 in the last one year and reversed from there. Currently, it is trading very close to its support near $764.
Source: TradingView
Hence, investors who are bullish on the stock can buy it at current levels with a stop loss of $75.8.
If the stock again manages to find support near current levels and changes its course, it can once again make a move towards $92.
Traders who are bearish on the stock must avoid shorting it at current levels considering that it has already fallen significantly.
A fresh short position must only be initiated if the stock gives a daily closing below $76.4.
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