This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About A.O. Smith
Although many are quick to think that clean and drinkable water are the only ways in which water is important, the same amount of folks are likely a little too quick to forget about water and its applications within the heating space.
Yes, water is obviously a big deal in the sanitization spectrum and other consumer realms, however, it is fairly difficult to get along in the developing and developed worlds without water heaters and boilers.
If water heaters and boilers didn’t matter, Milwaukee, Wisconsin-headquartered A.O. Smith simply wouldn’t be in business.
From the residential sector to the commercial sector, water heater and boiler manufacturer and marketer A.O. Smith is a force to be reckoned within this specialty water category.
Think of a simple apartment complex.
That complex is more than likely filled with (per legal requirements or not) some form of water heater(s) or boiler-type solutions, perhaps within each individual unit or through some centralized, community-wide system.
This being the case, this is just one of the many places or venues where products and services provided by A.O. Smith are crucial for everyday living.
Additionally, although technology seems to be enveloping and reshaping just about every form and aspect of human life as we know it, the water heater industry isn’t likely to be revolutionized or “technified” anytime soon.
Candidly, even if we were wrong, a company like A.O. Smith would be able to stay ahead of the technology curve or, in a more likely scenario, be willing to shell out a few hundred million or even a billion dollars or two in order to acquire one of its smaller, leaner, more technologically savvy competitors.
Now that we’ve covered some of the basics regarding the company, its respective industry and its operations, it seems like an appropriate time to get into some of A.O. Smith’s core financial figures and other relevant metrics so as to determine whether or not this company’s stock is worth considering investing in for today, tomorrow, the next day and of course, the next day.
A.O. Smith’s stock financials
Trading at a prevailing share price of $67.12 and accompanied with a market capitalization of $10.13 billion, a price-to-earnings (P/E) ratio of 44.68, not to mention the company’s annual dividend of $1.20, A.O. Smith’s stock (NYSE: AOS) appears to be a bit expensive relative to its actual intrinsic worth at the moment, specifically in reference to its rather elevated P/E ratio of 43.60, where it is generally held that a P/E of 20 implies that a stock is trading at exactly fair value and anything greater than 20 indicates that its stock is overvalued.
Being that the company’s P/E ratio as of this writing (4/10/2023) is trading at more than double than that of the fair value benchmark, it doesn’t seem like anyone’s getting a discount on the company’s stock anytime soon.
We’ll keep this in mind as we continue the analysis.
Getting a bit more familiar with A.O. Smith’s financials, let’s take a short trip over to the company’s balance sheet.
According to its balance sheet, it is strapped with around $3.3 billion in total assets as well as approximately $1.6 billion in terms of total liabilities.
We initially assumed this company would be total-asset heavy (given that it has been a strong player in the heater and boiler sectors of the water industry for quite some time now) and thus we weren’t stunned to find that this company is seemingly in a good place balance sheet-wise.
Moving right along to the company’s income statement, A.O. Smith has also checked off the “ability to generate consistent total annual revenue largely irrespective of the current economic conditions” box, as the company’s total annual revenue since 2018 has found itself pretty much in and ever so slightly around (more specifically, slightly above or below) $3 billion each year.
Consistent revenue generation on a year-over-year (YOY) basis is to be expected with a company with consistent operations and, likely, the security of long-term contracts with a whole host of customers, from property managers, businesses, individuals and many, many other entities.
Onto the company’s cash flow statement, A.O. Smith’s net income over the last five years hasn’t broken the consistency trend as its net income and total cash from operations have both remained consistent and positive.
Candidly, even though this company isn’t likely to grow like a weed in the years to come, we definitely take a lot of comfort in the fact that A.O. Smith operates in a fairly recession resistant sector, which has evidently been verified by the numbers in more ways than none.
A.O. Smith’s stock fundamentals
From the perspective of the company’s trailing twelve month (TTM) net profit margin, A.O. Smith’s is hardly impressive, which is more surprising than unsurprising, primarily in the context of its competition.
Some additional context might help.
Specifically, according to TD Ameritrade’s platform, A.O. Smith’s TTM net profit margin is tucked away at 6.28% to the industry’s average of 9.96%.
Although we’re not entirely certain as to why there is a notable discrepancy between A.O. Smith’s TTM net profit margin and the industry’s average, we know that we are puzzled and are not the biggest fans of this difference, especially given the company’s established market share within the industry.
In addition to its not so competitive TTM net profit margin, the company’s TTM return on investment trails behind the industry’s average as well, sitting at 9.92% to the industry’s average of 15.36%.
Should you buy A.O. Smith stock?
There are puts and takes to considering an investment in A.O. Smith’s stock at this current juncture.
What lays heavily on our minds is the company’s current valuation, which appears to be lofty, to say the least, according to its price-to-earnings ratio. Additionally, while the company’s revenue, cash flow and total cash from operations have been as consistent as its operations, this company isn’t likely to grow tenfold anytime soon and thus it doesn’t make all that much sense to overpay for a company that isn’t anywhere near being aligned with its current valuation.
All of this being said, it makes the most sense on our end to give A.O. Smith’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.