Like the steady, efficient water heaters that it manufactures, Milwaukee-based A.O. Smith Corp. is having another strong year.
As the calendar prepares to close on 2014, A.O. Smith’s stock is trading near an all-time high of $55.18 per share.
The company beat analysts’ expectations by posting third quarter net earnings of $50.6 million, or 56 cents per share, up from $46.2 million, or 50 cents per share, in the same period a year ago. The company’s quarterly sales grew 8.5 percent to $536.2 million.
The continued recovery of the U.S. housing market is fueling growing demands for residential water heaters. Home sales in the metro Milwaukee area were up 3.7 percent in October, compared with the same month a year ago, according to the Greater Milwaukee Association of Realtors.
Meanwhile, the commercial real estate market is flourishing, fueling demand for A.O. Smith’s line of commercial boilers. Nearly 86 percent of the members of the Commercial Association of Realtors Wisconsin said the commercial real estate market is improving in an annual survey conducted by BizTimes.
“A. O. Smith continued to benefit from improvement in several key sectors of the economy in the U. S.,” said Ajita Rajendra, chairman and chief executive officer of A.O. Smith. “A growing home construction market created higher demand for residential water heaters, and continued strength in high efficiency, condensing boilers favorably impacted demand for commercial boilers.”
A.O. Smith now occupies more than half of the U.S. residential water heater market and nearly half of the commercial boiler market.
The company’s share of China’s water heater market has quietly grown to about 25 percent, and it is developing a presence in India, as well.
“Our team in China continued to do an excellent job of growing the business and serving our customers in that important region of the world. Increased consumer demand for water heaters and water treatment products had a favorable impact. Overall, China sales increased approximately 16 percent in the quarter,” Rajendra said.
A.O. Smith also is well-positioned to capitalize on the prevalence of polluted water in China. The company began offering water filtration and purification systems for use in residential and commercial settings in 2009.
During the first nine months of the year, the company repurchased approximately 1.8 million shares of its common stock at a total cost of $86.6 million, indicating it is bullish about its outlook.
“Our A. O. Smith team continues to execute at a high level, and our focus on customer satisfaction and cost management can be seen in our strong financial performance to date,” Rajendra said. “With improved market conditions in our major markets, and continued customer acceptance of our products in China, we feel confident about our company’s prospects for the remainder of this year.”
As a result of that confidence, A.O. Smith increased is full-year adjusted earnings guidance to a range of $2.37 to $2.41 per share.
“These estimates do not include the potential impact from future acquisitions. We will continue to be disciplined in evaluating acquisition opportunities that fit our stated corporate strategy. Our team is continuing to actively pursue acquisition candidates that meet our financial criteria and create shareholder value,” Rajendra said.
All of these factors prompted Milwaukee-based Robert W. Baird & Co. Inc. to upgrade its ranking of A.O. Smith’s stock to “outperform” from “neutral” earlier this year. That rating was maintained in October.
“We continue to view AOS as an attractive long-term story given its healthy growth characteristics, impressive execution, and a relatively stable, defensive earnings stream. Effective capital deployment, healthy U.S. residential/commercial markets, 2015 regulatory changes, and China growth remain the catalysts,” Baird stated in its latest research note on A.O. Smith.
