A. O. Smith Exhibits Strong Prospects Despite Persisting Headwinds

A. O. Smith Corporation AOS engages in bolt-on acquisitions to augment its portfolio and expand its business geographically. In November 2024, the company acquired the Pureit business from Unilever. The inclusion of Pureit’s expertise in water treatment solutions, coupled with its strong brand recognition, will enable A. O. Smith to expand its customer offerings and boost its position in the water treatment industry in India. In March 2024, the company acquired privately held water treatment company Impact Water Products, which expanded its water treatment footprint in North America. The acquired company is included in the North America segment. The company spent $21.3 million on acquisitions in the first nine months of 2024.

A. O. Smith’s commitment to rewarding its shareholders through dividends and share buybacks is encouraging. In the first nine months of 2024, the company paid dividends worth $140.9 million, up 3.8% year over year. In October 2024, it increased the dividend by 6% to 34 cents per share (annually: $1.36). The company has increased its dividend consecutively for more than 30 years. In the first nine months of 2024, it also repurchased 2.9 million shares for $237.1 million. While exiting the third quarter, 2.7 million shares were left to be repurchased under the existing authorization. In the first quarter of 2024, the company’s board boosted the buyback program by another 2 million shares. For 2024, it expects to repurchase shares worth approximately $300 million.

A. O. Smith has a sound liquidity position. At the end of the third quarter, the company had cash and cash equivalents of $219.3 million, much higher than the current debt of $10 million. Exiting the quarter, AOS had a long-term debt of $109.7 million. This implies that it has sufficient cash to meet its debt obligations.

Headwinds Plaguing AOS

AOS is experiencing weakness in the Rest of World and North America segments. Lower volumes of water heaters and water treatment products in China are challenging for the Rest of World segment. The segment’s revenues declined 10% year over year in the third quarter of 2024. A decline in orders for residential and commercial water heater products in the North America segment is also concerning. In the third quarter, the North America segment’s sales declined 1% year over year as higher boiler and water treatment volumes were offset by lower volumes of residential and commercial water heaters.

Rising expenses put pressure on A. O. Smith’s bottom line. The company’s cost of sales was $1.8 billion in the first nine months, up 2.2% year over year due to higher material costs. SG&A expenses were up 2.8% year over year.  The increase was attributable to higher employee costs from increased wages and management incentives. The company's raw material costs primarily depend on steel prices, which are subject to fluctuations over time. Any increase in cost that does not generate sales growth, would directly impact margins and profitability.

AOS currently carries a Zacks Rank #3 (Hold). In the past year, the stock has lost 13.5% against the industry’s 14.8% growth.

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