What happened
Shares of A.O. Smith Corporation (AOS -4.80%) rose 12% in January according to data provided by S&P Global Market Intelligence. That beat the S&P 500 Index's roughly 8% advance by about 4 percentage points. However, there's more to the story.
For example, the S&P was down around 6% in 2018 versus a painful 30% drop for A.O. Smith. Even after a strong January, water-heater maker A.O. Smith remains a relative laggard.
So what
The reason for the 2018 decline in A.O. Smith's stock price was on clear display when the company reported earnings in late January. Although the North American business was fairly strong, with revenues up 7%, the company's rest of the world segment saw a revenue advance of just 5%, which is a notable slowdown from historical trends.
Image source: Getty Images.
The main culprit here is China, the largest end market in this division, which is experiencing a slowdown in economic growth. The full-year figures hide the pain to some degree, with the year-over-year sales decline of 5% in China in the fourth quarter more fully capturing the issue. The future won't be much better, with A.O. Smith expecting Chinese sales to fall between 3% and 6% in 2019. This helps explain why the stock got hit so hard in 2018.
Check out the latest A.O. Smith earnings call transcript.
The stock rebound in the first month of 2019, meanwhile, doesn't seem backed by the company's projections. China is expected to remain a weak spot, pulling the company's overall sales growth down into the low single digits. There are bright spots, like strong growth in India, a smaller but strengthening market for the company. But A.O. Smith is clearly still facing headwinds, which suggests that the upturn in the shares in January, like the broader market, had more to do with investor sentiment than financial results.
Now what
There's no question that A.O. Smith is facing a real challenge today as it works to navigate an economic slowdown in one of its most important markets. In 2018, that was enough to send the stock sharply lower, with investors increasingly worried about not just China, but also the rest of the company's key markets. Since the start of the year, investors have taken a more sanguine view of the situation and pushed the market and A.O. Smith higher.
That, however, doesn't alter the fact that the company is facing real headwinds. The January outperformance, then, is really more about bouncing back from a big sell-off as mercurial investors change their minds yet again. If you own A.O. Smith or are thinking about buying it, which isn't a bad idea, you need to keep your eyes firmly on China. That's true even though the market seems to be worrying less and less about the impact of that country's slowdown on Smith's performance.
