Technology

A.O. Smith (AOS) Up 1.9% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for A.O. Smith (AOS). Shares have added about 1.9% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is A.O. Smith due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

A. O. Smith Q2 Earnings Beat Estimates, Sales Miss

A. O. Smith has reported mixed second-quarter 2020 results, wherein earnings beat estimates, while revenues lagged the same.

The company’s adjusted earnings were 45 cents per share, beating the Zacks Consensus Estimate of 44 cents. However, the bottom line declined from the year-ago figure of 61 cents.

Top-Line Details

The company’s second-quarter net sales decreased 13.3% year over year to $663.9 million. The decline was primarily attributable to lower sales in North America as well as China and weakness in other global end markets amid the coronavirus pandemic. Notably, the figure narrowly missed the Zacks Consensus Estimate of $665 million.

A.O. Smith’s sales in North America (comprising the U.S. and Canada water heaters and boilers) moved down 8.3% year over year to $480.5 million. The segment’s results were affected by lower sales volume of commercial water heater and boiler products, partially offset by higher sales volume of water treatment products.

Segmental operating earnings were down about 14% to $105.4 million on a year-over-year basis. The decline was on account of lower sales volume of commercial water heaters and boilers.

Quarterly sales in Rest of World (including China, India and Europe) fell about 24% year over year to $189.7 million. The decline was primarily attributable to a higher sales mix of mid-price products and reductions in customer inventory levels.

Operating loss at the segment was $5.8 million against operating earnings of $22.4 million recorded in the year-ago quarter. Lower sales in China were detrimental to the segment’s income.

Liquidity & Cash Flow

On Jun 30, 2020, A.O. Smith’s cash and cash equivalents totaled $442.7 million compared with $374 million as of Dec 31, 2019.

At the end of the reported quarter, long-term debt was $274.3 million compared with $277.2 million as of Dec 31, 2019.

In the first six months of 2020, cash provided by the operating activities totaled $179.3 million compared with $143.7 million in the year-ago comparable period.

Share Repurchases

In mid-March, the company suspended its share repurchase activity, owing to the uncertain business environment created by the coronavirus pandemic. Therefore it refrained from buying back any shares in the second quarter of 2020.

Guidance

The company issued earnings guidance for 2020. It expects adjusted earnings of $1.72-1.86 per share. The mid-point reflects a year-over-year decline of 19.4%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, A.O. Smith has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, A.O. Smith has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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

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