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Why A. O. Smith Stock Rose as Much as 14% at the Open Today

By Reuben Gregg Brewer - Jan 28, 2021 at 12:10PM

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No, it wasn't a short squeeze. A. O. Smith actually had some good news to report to investors. Here's what it was.

What happened

Shares of water heater maker A. O. Smith (AOS -1.16%) rose 14% in early trading today. Although it pulled back a little from that peak, at 11 a.m. EST the stock was still higher by about 12%. The best part of the gain, however, is that it was driven by earnings news, not some Wall Street craze (the so-called short squeeze) that has enthralled investors, news media, and now even politicians. 

So what

Analysts had been expecting A. O. Smith to post earnings of $0.58 per share in the fourth quarter of 2020. However, when the final tally came in, the number was $0.74 per share, a material bottom-line beat. On the top line, Wall Street was projecting revenue of roughly $770 million, with A. O. Smith reporting $834 million, another solid beat. For the full year, the industrial company earned $2.12 per share on revenue of about $2.9 billion. Investors were pleased with the results and pushed the stock higher on the news.  

The word Growth spelled out with blocks aligned on an upward sloping line

Image source: Getty Images.

Digging down into the numbers leads to mixed but improving trends. For example, sales increased 2% year over year in the North American division, but were at record levels in the fourth quarter, up 7%. The "rest of world" group, which is largely made up of A. O. Smith's Chinese business, saw full-year sales decline 14% year over year, but the fourth quarter witnessed a 19% sales increase. The reason for the disparate results was basically the coronavirus pandemic, which depressed demand in its early days but has since been less of an issue. The company provided earnings guidance suggesting a 13% improvement in 2021, but hedged the number by saying it assumed that the rest of 2021 would be similar to recent business performance. Essentially, if there are more coronavirus-related disruptions, that number likely won't hold.  

Now what

Although A. O. Smith makes some pretty boring products (water heaters), it has a long history of solid growth behind it. The ability to bounce back from the pandemic hit, meanwhile, is a testament to the underlying strength of its business. Equally enticing is the company's 27 consecutive years worth of dividend increases, putting it into the elite Dividend Aristocrat space. The annualized rate of increase over the past decade, meanwhile, was an impressive 22%. The stock is rarely cheap, which remains true today given its trailing P/E of nearly 30, but dividend growth investors may want to keep it on the wish list just in case there's a sell-off.   

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