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Why A.O. Smith Corporation Stock Surged in November

By Lee Samaha - Dec 6, 2017 at 7:53AM

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The water heater company's analyst presentation was well digested by the market.

What happened

The stock price of residential and commercial water heater and boiler manufacturer A.O. Smith Corporation (AOS -0.47%) rose 7.1% in November largely after an upbeat presentation to analysts on Nov. 9.

Essentially, the company reiterated the investment case for buying the stock and highlighted management's projection of organic revenue growth of 8% for the next several years.

A.O. Smith water heaters.

A collection of A.O. Smith residential water heaters. Image source: A.O. Smith Corporation.

In a nutshell, A.O. Smith has a market leading position in the water heater market in the U.S. -- around 40% of the residential market and more than 50% of the commercial gas water heater market -- from which it generates a steady stream of earnings and cash flow from replacement demand -- around 85% of total North America demand. While replacement demand makes up the bulk of U.S. residential sales the company also has upside from an increase in incremental sales from an improving U.S. housing market -- management believes it can leverage these extra sales into increased profitability.

However, the really exciting part of the growth story comes from the company's exposure to emerging markets. For example, management claimed its China sales have grown at a compound annual growth rate of 22% over the last 10 years and now represent 33% of total company sales. Moreover, A.O. Smith now has over 25% market share in the residential market share in China, and given the potential to generate long-term replacement sales by developing sales in new construction projects, the future looks bright.

Throw in the opportunity to develop sales in India and water treatment and air purifier solutions in China and management's presentation gave investors and analysts cause for optimism.

 So what

While management made no changes to the full-year guidance on the third-quarter earnings call -- full-year revenue is still expected to grow 11%-12% and full-year EPS in the range of $2.12-$2.14 implies growth of 15% at the midpoint -- the presentation highlighted the long-term growth opportunity for a company with a commanding market position in attractive end markets.

Now what

Looking forward investors will be focused on the company developing sales in China while capitalizing on ongoing strength in U.S. housing starts. On a less positive note, commodity costs are rising and this could pressure margin, while the North America replacement market could see some weakness as it comes up against the 10-year anniversary of a weak period (2007-2012) of housing starts. No matter, emerging market growth prospects should continue to propel A.O. Smith toward its target of 8% annual organic revenue growth in the next few years.

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A. O. Smith Corporation Stock Quote
A. O. Smith Corporation
$54.54 (-0.47%) $0.26

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