What's in the Offing for A. O. Smith (AOS) in Q3 Earnings?

A. O. Smith CorporationAOS is scheduled to release third-quarter 2018 results on Oct 30, before the market opens.

Notably, the company delivered better-than-expected results in each of the trailing four quarters, resulting in an average positive earnings surprise of 4.73%. Notably, in the last reported quarter, the company's earnings of 66 cents surpassed the Zacks Consensus Estimate of 62 cents.

Let us see how things are shaping up for A. O. Smith this quarter.

Factors to Affect Q3 Results

A.O. Smith's long-term growth potential and strong position in the defensive replacement market sets it apart from its peers. The company's defensive replacement market, which accounts for approximately 85% of the North American water heater and boiler volumes, has been on an uptrend. Also, the company expects revenues from its boiler business to grow roughly 10% in 2018. Further, U.S. commercial water heater industry volumes might gain from strong demand for electric units as well as pre-buy of electric units in advance of regulatory change-driven price increase.

Also, the company's business in China has grown significantly over the years. For instance, in second-quarter 2018, sales generated from Chinese operations grew 12% year over year or 4% in local currency. Growth of overall water heater market in China is expected to be fuelled by factors including growth of households, thriving replacement market, growth in water treatment and air purification products as well as improved product mix. Also, it expects improved operations in India due to increasing scale in the water heater business.

Amid this backdrop, the Zacks Consensus Estimate for revenues from A.O. Smith's North America geographic segment for the to-be-reported quarter is currently pegged at $517 million, reflecting growth of 6.4% year over year. Revenues from Rest of the World are also anticipated to be strong, with estimates standing at $293 million compared with reported revenues of $270 million in the year-ago quarter.

Although A.O. Smith's expansion initiatives bode well for long-term growth, high capital expenditure incurred negatively impacts its short-term earnings. Also, corporate expenses are likely to be $48 million in 2018, primarily led by the higher projected spending at the company's corporate R&D center. These actions are expected to put pressure on the company's profitability in the near term.

Moreover, higher selling costs coupled with developmental costs associated with new products, including expansion of air purification product portfolio, are driving the company's operating expenses in China. This apart, unfavorable movements in foreign currencies are concerning.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for A.O. Smith in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Earnings ESP: A.O. Smith has an Earnings ESP of 0.00%, as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 63 cents. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

A. O. Smith Corporation Price and EPS Surprise

A. O. Smith Corporation Price and EPS Surprise | A. O. Smith Corporation Quote

Zacks Rank: A.O. Smith carries a Zacks Rank #3, which increases the predictive power of the ESP. However, its ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Flowserve Corporation FLS has an Earnings ESP of +1.72% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

The Timken Company TKR has an Earnings ESP of +0.94% and a Zacks Rank #2.

Parker-Hannifin Corporation PH has an Earnings ESP of +0.08% and a Zacks Rank #3.

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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.

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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