The market’s strange reaction to A. O. Smith
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The market’s strange reaction to A. O. Smith

Water equipment manufacturer A. O. Smith released quarterly earnings this week, demonstrating (yet again) a robust underlying business that is showing stellar growth. As expected, the company’s share price has remained totally flat on the back of these results. Wait… what?

A. O. Smith’s share price has appreciated by exactly 0% over the last 5 days

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Source: Yahoo Finance

For the last five quarters, the company has beaten expectations and raised guidance. It did that again this time around, but investors just don’t seem to care. It could be that investors are worried that the company is trading too highly (although considering the incredible growth it continues to post, that seems a hard position to justify). Or it could be that panic over tariffs is scaring people off (It is a growth story in China, although there’s no reason to think A. O. Smith is more exposed to a trade war than other companies). Whatever the reason, the market has failed to fairly recognise a good company – for now.

Here’s the results that matter: The company’s revenue increase to $833 million (from $738 million in the comparable quarter last year, and $788 million in the first quarter of the year). Its operating income also rose, from $128 million in the year-ago quarter to $146.1 million this time round. Its Net income hit $114.5 million (a year ago, it came in at $92.4 million). And its earnings per share (EPS) stood at 66¢ (In the second quarter of 2017, it managed an EPS of 53¢). These figures easily beat expectations on revenue and earnings.

The breakdown of where the money came from is a little different this time around: better pricing saw a major increase in the North American business (which is mostly replacements) offset higher material costs, and the company is still waiting for its Chinese factory to get up to speed. However, in the words of Dominion analyst Christian Cole, the company “remains a strong play on emerging market urbanisation.”

As has become usual, the company offered a positive take on the future (that, so far, it has consistently delivered). CEO Ajita Rajendra said:

“We believe our North America business will remain strong, bolstered by continued demand in all parts of the business. We now forecast total company sales growth between 9.5 and 10 percent in 2018. The impact of a weaker Chinese currency compared to our April forecast reduced our guidance for full-year sales by $22 million.”

“We increased our adjusted 2018 earnings guidance to a range of $2.59 and $2.63 per share. The midpoint of our adjusted 2018 earnings guidance represents a 20 percent increase over 2017 adjusted earnings per share, and we project our second-half earnings to be better than the first half.”

Dominion holds A. O. Smith in its Global Trends Managed Fund.

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