A. O. Smith Corporation AOS reported first-quarter 2018 earnings per share of 60 cents, ahead of the Zacks Consensus Estimate of 58 cents. The company continues its earnings beat streak of 25 straight quarters, which it broke once when it reported in-line earnings in second-quarter 2017.
The figure improved 18% from the year-ago quarter's tally. The upside mainly came on the back of robust sales growth. However, higher steel prices and inflationary pressure on freight and other costs dampened earnings growth to some extent.
Inside the Headlines
The company generated record sales in the quarter which rose 6.5% year over year to $788 million. However, the figure missed the Zacks Consensus Estimate of $793 million by a whisker. A thriving water heater industry in the United States, strong demand for Lochinvar branded boilers and robust consumer product demand in China fueled the top-line growth.
A.O. Smith's sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) grew 3% year over year to $501.7 million. Higher volumes of commercial water heaters, strong sales of boilers and pricing actions related to elevated steel costs proved conducive to the sales performance of this region. Water treatment products contributed about $8 million to revenues and boosted the segment's growth.
Segmental operating earnings inched up 2% year over year to $106 million. The segment's profit was favorably influenced by higher sales of commercial water heaters and boilers and pricing actions. However, the benefit was partially offset by flared up steel and other costs. Consequently, adjusted operating margin expanded 110 basis points (bps) to 22.5% on a year-over-year basis.
Quarterly sales at the Rest of the World segment (including China, India and Europe) were up 13% year over year to $293.8 million. The improvement came on the back of consistent solid customer demand for A.O. Smith's gas tankless water-heating and water-treatment products. Also, favorable pricing actions added to the top line. However, a significant decline in air purification product sales in China dampened growth to some extent.
Operating earnings at the segment climbed 11% year over year to $36.1 million in the quarter. The favorable impact of excellent sales in China, along with favorable pricing actions, was partially offset by escalating steel costs and selling and engineering expenses. Operating margin contracted 20 bps to 12.3% year over year.
A. O. Smith Corporation Price, Consensus and EPS Surprise
A. O. Smith Corporation Price, Consensus and EPS Surprise | A. O. Smith Corporation Quote
During the quarter, A.O. Smith repurchased around 520,000 common shares for $33 million. At the end of the quarter, the company has approximately 1.9 million shares remaining under the existing discretionary repurchase authority.
Liquidity & Cash Flow
Exiting the quarter on Mar 31, 2018, A.O. Smith's cash and cash equivalents totaled $241.9 million compared with $293.4 million in the prior-year quarter. Cash generated from operations during the year came in at $43.2 million, compared to cash used in operations of $11.5 million last year, as the quarter's cash flow benefited from higher adjusted net earnings and smaller increases in working capital.
At the end of the reported quarter, long-term debt was $285.5 million compared with $402.9 million witnessed at the end of Dec 31, 2017.
Recently, A. O. Smith announced that it was chosen as the primary supplier of water treatment products to all Lowe's home improvement stores in the United States. The company expects sales of roughly $15 million, along with start-up and transition costs, from the new business in 2018.The new relationship is likely to accelerate growth of the company's North American water treatment product line.
Concurrent with the first-quarter results, the company raised guidance for 2018. A.O. Smith expects adjusted earnings between $2.55 and $2.61, up from the previous range of $2.50-$2.58. The mid-point of the range reflects impressive year-over-year growth of 19%.
Additionally, the company expects to register revenue growth of 10-10.75% in 2018, supported by stable water heater replacement demand.
A.O. Smith started 2018 with good momentum, delivering strong sales growth driven by consistent demand for its consumer products in China and positive end markets for the company's water heaters and boilers in North America. The company's continued sales and earnings growth over the past several quarters highlight its underlying strength.
We believe that stellar prospects in China and the U.S. end markets will continue to accelerate growth in the near future. Also, dominant foothold in the North American water-heater market, along with thriving prospects in the residential and commercial boiler markets, is likely to stoke growth for the Zacks Rank #2 (Buy) company.
However, over the past few quarters, A.O. Smith's SG&A expenses in China (including elevated steel costs and higher fees paid to installers) have been quite high, which is creating pressure on the company's operating margins.
Other Stocks to Consider
A few other top-ranked stocks in the same space worth a look include Eaton Corporation, PLC ETN , II-VI Incorporated IIVI and Rexnord Corporation RXN , each carrying a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Eaton has a modest earnings surprise history for the trailing four quarters, having beaten estimates twice for an average beat of 3%.
II-VI has a decent earnings surprise history, with an average beat of 13.8% over the preceding four quarters, beating estimates thrice.
Rexnord boasts an impressive earnings surprise history, with an average beat of 12.6% over the preceding four quarters, beating estimates all through.
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