A. O. Smith Corporation (NYSE: AOS) manufactures hot water heaters, boilers and water treatment products. The company has approximately 16,300 men and women in operations in the United States, Canada, Mexico, China, India, the United Kingdom, the Netherlands and Turkey, which have the global reach to serve customers worldwide. The company has a history of 1
North America accounts for nearly 64% of total global sales. The strong replacement sales of about 85% of the total business show the sustainability of the business. The innovation, training and customer service 24/7 national account runs market leadership. Sales increased by 10% CAGR over the past decade, EBITDA grew by 19% CAGR and EPS grew to 25% CAGR during this period. You can find the analyst representation in the fall of 2019 here.
Historical dividend, return and price movements:
The following table shows market price movements, dividend rates, dividend growth and related derivative data over the past decade.
|Open||High||Low||Close||Quarterly Dividend Rate||Dividend Growth Over Previous Year||Dividend Yield Low||Dividend Yield High|
|2017||47.35||63.70||46.44||61.28||0.14000  16.67%||0.88%||1.21%|
|2015||28.21||40.58||25.05  38.31||0.09500||26.67%||0.94%||1.52%|
|2014||26.97||28.58  22.07||28.21||0.07500||25.00%||1.05%||1.36%|
|2012||10.03||15.99  10.03||15.77||0.05000  25.00%||1.25%||1.99%|
|2011||9.60  11.21||7.45||10.03||0.04000||1.43%||2.15%|
Note that the minimum and maximum yields as shown above is not perfect since I used the revised dividend rate x 4 divided by the high / low levels of the market to arrive at the maximum or minimum dividend yield in each of those years. It serves my purpose for a quick evaluation.
Why did price trends go bad in the last two years?
In addition to the growing business in North America, AOS saw rapid growth in China until 2018. The economy slowed in China in the last two years. AOS addressed these problems with a 20% reduction in the number of employees, closure of 700 online stores, reduced SG&A and took the initiative to reduce channel inventory. The third third quarterly revenue in 2019 saw a 6% growth in North American revenues while the rest of the world saw a turnover decline of about 20%. This had a total reduction in turnover of 3%. Below is the EPS Guide for 2019:
AOS is now trading at around $ 45 / -, a price range seen in 2016. The current dividend of 0.24 per quarter yields a 2.10% dividend (the dividend is exactly double that of the dividend paid in 2016). Net cash flow from operations in 2019 is expected to be around that year 2018. Debt to capital ratio is very low at 16%. The current dividend is 40% of EPS. The current EPS return is 5.28% on the market price. AOS continues to buy shares in the market.
What I see here for my investment idea is that the sale happened on news. Reality should not lead to more price crash unless a new trend emerges. The market price has been consolidated for quite a year, with around $ 40 as a base. The new mega trends in other markets are holding the trigger for future growth. The US trade agreement with China should bring back some moderate growth in China. The mega trend in India is another growth driver waiting to evolve. India's population is large. The majority of sales in North America are growing and are sustainable. I look at AOS as a growth choice at a fair value for my long-term portfolio. AOS has planned to report December-2019 financial results on January 28, 2020. If the quarterly results provide any negative surprises, or if the markets become choppy, AOS may retry the $ 40 or $ 42 range. The market in such a case can provide a better discounted value than now. It is difficult to find a growth share with an EPS return of more than 5%, ie a P / E multiple of less than 20 or a comparatively low debt and low dividend payout. I went long in AOS with a small starting position of $ 45.21 today, ahead of the results. If the price trend is lower, I can add more at the appropriate time.
Consumers in a country known for the thick smog clouds that regularly blanket the largest cities caused headwinds a year back. Can the coronavirus outbreak in the Wuhan region of China create more headwinds for Nanjing, China-based AOS plant? This is more of a short-term view. Can the manufacturer of hot water heaters and purifiers that have been investing in the Chinese air purification and water treatment market for several years push AOS back into growth trajectories? Can megatrends in India, similar to megatrends in China, continue to grow investment in AOS and sustain the growth trajectory for another decade? I think & # 39; yes & # 39; and is bullish on AOS in the long term.
Please use your own care to make a purchase or sell decision.
Publication: I am / we are a long time AOS. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.