A.O. Smith Could Be In Stock Market's Sweet Spot


Where's the sweet spot in this choppy stock market?

Water-heater manufacturerA.O. Smith ( AOS ) might be in one of the sweet spots. On Wednesday, the company reported 47% earnings growth for Q2, trumping views for a 31% gain. Revenue rose 19%, edging over the consensus estimate of 17%.

The results marked the fourth straight quarter of EPS growth in the 27% to 66% range. Many investors set 25% as the minimum level for an elite stock. The Street expects 26% EPS growth in Q3 on an 18% revenue gain.

A.O. Smith has a number of factors breaking its way right now:

•The Building-Air Conditioning and Heating industry group was No. 10 of 197 industry groups, as of Wednesday's IBD. The building sector is No. 3 of 33 sectors.

•The company has minimal exposure to Europe. Foreign exposure is mainly in China.

•Sales in China remain strong -- up 17% in Q2. The company expects its growth in China to be two times China's GDP growth rate.

•New U.S. housing construction is improving. On Wednesday, the Commerce Department said home starts in June were at the highest level in four years, and the May figure was revised upward. "For the mid- and long-term, we see traction coming from new building permits in the U.S.," Maxim Research said in a note about Smith's results.

•In December 2010, A.O. Smith agreed to sell its electric motor business toRegal Beloit ( RBC ), a deal wrapped up in August. The move was part of A.O. Smith's strategic decision to concentrate on its water heating and purification lines.

A.O. Smith then bought privately held Lochinvar, a company that makes boilers used in higher-efficiency hydronic heating and hot water applications. The Lochinvar acquisition is working out well, and the move to higher-efficiency units is expected to be the trend.

On July 10, the company announced it was increasing its quarterly dividend to 20 cents a share from 16 cents -- the seventh year in a row of an increase. The annualized yield is 1.6%.

Although last year's 9% pretax margin was a nine-year high, return on equity was 11%, below the 17% associated with elite stocks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: AOS , RBC

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