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A. O. Smith (AOS) Gains From Business Strength Amid Risks

A. O. Smith (AOS) is poised to gain from solid demand for its products, acquired assets and shareholder-friendly policies. Rising costs and expenses, and high capital expenditure remain concerning.

This story originally appeared on Zacks

A. O. Smith Corporation AOS has been benefiting from the solid demand for water heaters, boilers and water treatment products, supported by its strong retail and direct-to-consumer sales channel. Demand improvement for the company’s products in India and China along with its product-development initiatives and strong price management capabilities will likely be beneficial in the quarters ahead.

For 2021, it expects sales from its boiler and water treatment businesses in North America to grow 13% and 12%, respectively, on a year-over-year basis. For the year, its total revenues are likely to grow 20-21% year over year.

The company’s acquisition of Master Water Conditioning Corporation (July 2021) has been boosting its water treatment business in North America. Also, its buyout of Giant Factories (October 2021) is anticipated to expand its commercial and water heater offerings. AOS predicts the Giant Factories buyout to be accretive to its earnings by 6-8 cents per share in 2022.

A. O. Smith’s ability to generate strong cash flows allows it to effectively deploy capital for repurchasing shares and paying out dividends. Exiting third-quarter 2021, its cash, cash equivalents and marketable securities were $685 million.

For 2021, it expects cash flow from operations of $550-$575 million. In the first three quarters of 2021, it used $125.4 million and $212 million for paying out dividends and repurchasing shares, respectively. In October 2021, it hiked the quarterly dividend rate by 8%.

However, escalating costs and expenses remain major concerns for A. O. Smith. In third-quarter 2021, its cost of sales increased 24.1%, and selling, general and administrative expenses rose 11.4% on a year-over-year basis. Also, high capital expenditure might affect its short-term liquidity. For 2021, it expects a capital expenditure of $70-$75 million.

Supply-chain constraints, raw-material inflation, and a shortage of labor might also affect the company’s performance in the near term. In the third quarter, its gross profit margin fell 190 basis points year over year, owing to higher steel and other material costs.

The Zacks Rank #3 (Hold) company’s shares have gained 18.7% compared with 6.6% growth recorded by the industry in the past six months.

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