Growth & Income: A.O. Smith Corp. (AOS)

A.O. Smith Corporation (AOS) recently surprised analysts with a solid second quarter, and its fifth consecutive earnings surprise. Overall sales increased 15% year-over-year.

A.O. Smith manufactures water heating equipment and electric motors for the residential, commercial and industrial markets throughout North America and China.

The company is based in Milwaukee and has a market cap of $1.65 billion.

Results From the Second Quarter

A.O. Smith beat the Zacks Consensus Estimate by 21%, reporting EPS of $1.21. Strong growth was seen in both its water and electrical products divisions.

Sales for the second quarter were divided as follows:

Water Products: 65%

Electrical Products: 35%

Sales in the water products division increased 11% from the second quarter in 2009, driven by growth in the Chinese and Canadian markets.

The electrical products division saw sales jump an impressive 22%. This growth was driven by strong demand for replacement motors in the residential heating and air conditioning market.

The company has also been increasing its efficiency as it closed plants and streamlined its manufacturing before and during the Great Recession. Gross profit improved to 27.7% in the quarter, compared with 24.5% in the second quarter of 2009.

Looking Ahead

A.O. Smith is expected to face headwinds domestically given the weak real estate market, but the company has been increasing its presence overseas. The water products division has been growing rapidly in China, and management believes growth will continue at two or three times China’s GDP. In addition, the company began producing residential water heaters for the Indian market during the second quarter.

Earnings estimates have been trending much higher since the latest earnings release. The Zacks Consensus Estimate for 2010 is currently $4.02 per share, a 21% increase from 2009. Analysts are expecting 8% EPS growth in 2011. Management is a bit more conservative, giving guidance for 2010 in the $3.73 to $3.93 range (excluding a one-time charge for flood related expenses).

Fundamentals

A.O. Smith is trading at 13.4x 2010 earnings and 2.0x book value, both in-line with its peer group.

It has a dividend yield of 1.6%, well above the 0% industry average. The company has paid a dividend every year since 1940 and recently increased its dividend by 8%. It has increased its dividend in 8 of the last 9 years.

A.O. Smith is a Zacks #1 Rank (strong buy) stock.

By: Todd Bunton

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