A. O. Smith Corporation (AOS) has experienced an impressive 22% increase in its stock price year-to-date, surpassing the industry’s 20.2% growth. This surge is primarily attributed to strong demand for both commercial and residential water heaters.
Image Source: Zacks Investment Research
Factors Driving the Price Surge
While boiler sales have declined, AOS’ North America segment is supported by robust demand for commercial and residential water heaters. The company expects water treatment sales to grow by 5-7% in North America by 2023.
The Rest of the World segment has also contributed to A. O. Smith’s growth, with strong demand in China and India for residential and commercial water treatment products. China sales are projected to increase by 3-5% and India sales by 15% in 2023.
A. O. Smith’s improved earnings guidance for 2023 has also boosted investor optimism. The company expects adjusted earnings of $3.45-$3.60 for the current year, reflecting a 12% year-over-year increase at the mid-point.
In addition, the company has rewarded shareholders with dividends and share buybacks. In the first half of 2023, AOS paid dividends of $90.6 million, a 3.1% increase from the previous year. The company also repurchased 1.08 million shares for approximately $70 million during that period and plans to repurchase shares worth about $300 million in 2023.
Will the Positive Momentum Continue?
A. O. Smith’s growth prospects look promising due to improving supply chains and signs of a gradual recovery in manufacturing activities. While manufacturing activity remains weak, there are indications of improvement, as shown by the July Supply Management report. The Manufacturing Purchasing Manager’s Index inched up to 46.4% last month, compared to June’s figure, with new orders seeing a 1.7 percentage point increase.
Despite a soft economic environment and lower demand, A. O. Smith has provided a cautious outlook for 2023. The company expects sales to either increase or decrease by up to 2%. The performance of the North America segment may be influenced by lower boiler sales.
Zacks Rank & Other Stocks to Consider
Presently, A. O. Smith holds a Zacks Rank #1 (Strong Buy). Some other top-ranked stocks in the Industrial Products sector include Graham Corporation (GHM) and Flowserve Corporation (FLS).
Graham Corporation (GHM) has a Zacks Rank #1 and has delivered an average trailing four-quarter earnings surprise of 243.1%. The stock has already gained 68.4% this year.
Flowserve Corporation (FLS) is another Zacks #1 Ranked player, with an average trailing four-quarter earnings surprise of 6.2%. The stock has risen 24.5% year-to-date.
Opportunity in the Infrastructure Sector
A massive push to rebuild the infrastructure in the United States is set to begin, with trillions of dollars expected to be spent. This presents a significant opportunity for investment. Zacks has released a Special Report highlighting 5 companies that stand to benefit the most from this infrastructure boom. Download the report for free today and gain insight into these potential investment opportunities.
Disclaimer: The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Nasdaq, Inc.