A. O. Smith Corporation (AOS) Bundle
Understanding A. O. Smith Corporation (AOS) Revenue Streams
Understanding A. O. Smith Corporation’s Revenue Streams
The company reported net sales of $902.6 million in the third quarter of 2024, representing a 3.7% decrease from $937.5 million in the third quarter of 2023. For the first nine months of 2024, net sales were $2,905.7 million, which is a 1.4% increase compared to $2,864.7 million in the same period last year.
Breakdown of Primary Revenue Sources
-
North America Segment:
- Net Sales in Q3 2024: $703.3 million
- Net Sales in Q3 2023: $709.9 million
- Net Sales for the first nine months of 2024: $2,260.3 million
- Net Sales for the first nine months of 2023: $2,184.9 million
-
Rest of World Segment:
- Net Sales in Q3 2024: $210.3 million
- Net Sales in Q3 2023: $233.4 million
- Net Sales for the first nine months of 2024: $682.0 million
- Net Sales for the first nine months of 2023: $696.7 million
Year-over-Year Revenue Growth Rate
The year-over-year revenue growth rates are as follows:
| Period | Net Sales (2024) | Net Sales (2023) | Growth Rate |
|---|---|---|---|
| Q3 | $902.6 million | $937.5 million | -3.7% |
| First Nine Months | $2,905.7 million | $2,864.7 million | +1.4% |
Contribution of Different Business Segments to Overall Revenue
The contribution of different segments to overall revenue is detailed below:
| Segment | Q3 2024 Net Sales | Q3 2023 Net Sales | First Nine Months 2024 Net Sales | First Nine Months 2023 Net Sales |
|---|---|---|---|---|
| North America | $703.3 million | $709.9 million | $2,260.3 million | $2,184.9 million |
| Rest of World | $210.3 million | $233.4 million | $682.0 million | $696.7 million |
Analysis of Significant Changes in Revenue Streams
In the third quarter of 2024, the decrease in net sales was primarily attributed to:
- Lower sales volumes in China
- Decreased residential and commercial water heater volumes in North America
In contrast, the first nine months of 2024 saw an increase in net sales driven by:
- Pricing actions
- Higher sales of water heaters and boilers in North America
The acquisitions of water treatment companies contributed approximately $6 million and $14 million of incremental net sales in Q3 and the first nine months of 2024, respectively.
Overall, the company’s gross profit margin for Q3 2024 was 37.4%, slightly down from 38.0% in Q3 2023, while the gross profit margin for the first nine months of 2024 was 38.5%, down from 38.9% in the prior year.
A Deep Dive into A. O. Smith Corporation (AOS) Profitability
A Deep Dive into A. O. Smith Corporation's Profitability
Gross Profit, Operating Profit, and Net Profit Margins
In the third quarter of 2024, the gross profit margin was 37.4%, down from 38.0% in the third quarter of 2023. For the first nine months of 2024, the gross profit margin was 38.5%, compared to 38.9% during the same period in 2023. The decline in gross profit margins was attributed to lower volumes and increased production costs.
Operating profit for the third quarter of 2024 was $156.6 million, compared to $176.4 million in the third quarter of 2023. For the first nine months of 2024, operating profit was $555.9 million, slightly down from $556.6 million in the previous year.
Net earnings in Q3 2024 were $120.1 million, a decrease from $135.4 million in Q3 2023. For the first nine months of 2024, net earnings were $423.9 million, compared to $419.3 million in the same period of 2023.
Trends in Profitability Over Time
The following table summarizes the key profitability metrics over the past two years:
| Metric | Q3 2024 | Q3 2023 | 9M 2024 | 9M 2023 |
|---|---|---|---|---|
| Gross Profit Margin | 37.4% | 38.0% | 38.5% | 38.9% |
| Operating Profit | $156.6M | $176.4M | $555.9M | $556.6M |
| Net Earnings | $120.1M | $135.4M | $423.9M | $419.3M |
Comparison of Profitability Ratios with Industry Averages
Comparing the profitability ratios of A. O. Smith Corporation with industry averages reveals the following insights:
- Gross Profit Margin: A. O. Smith's gross margin of 37.4% is slightly below the industry average of approximately 40%.
- Operating Profit Margin: The operating margin stands at 17.4%, while the industry average is around 20%.
- Net Profit Margin: A. O. Smith's net profit margin of 13.3% is also lower than the industry standard of about 15%.
Analysis of Operational Efficiency
Operational efficiency can be assessed through various metrics, including cost management and gross margin trends. The following points summarize the operational efficiency of A. O. Smith Corporation:
- SG&A expenses for Q3 2024 were $176.6 million, an increase from $174.9 million in Q3 2023.
- For the first nine months of 2024, SG&A expenses totaled $557.3 million, compared to $542.4 million in the same period of 2023.
- The increase in SG&A expenses is largely due to higher employee costs and management incentives.
Despite the increase in SG&A, the company has managed to maintain a competitive position in the market, although the pressures from rising production costs and lower volumes have affected overall profitability.
Overall Profitability Insights
With a focus on improving operational efficiencies and managing costs, A. O. Smith Corporation aims to enhance its profitability metrics moving forward. Continuous monitoring of gross, operating, and net profit margins will be essential for investors looking to assess the financial health of the company.
Debt vs. Equity: How A. O. Smith Corporation (AOS) Finances Its Growth
Debt vs. Equity: How A. O. Smith Corporation Finances Its Growth
Debt Levels
As of September 30, 2024, the company's total debt comprised $119.7 million, including $10.0 million in short-term debt and $109.7 million in long-term debt. This represents a decrease of $7.6 million in total debt since December 31, 2023, when total debt was $127.3 million.
Debt-to-Equity Ratio
The company's debt-to-equity ratio stands at 6.2% as of September 30, 2024. This is significantly lower than the industry average, which typically ranges from 20% to 30% for similar companies in the consumer goods sector.
Recent Debt Issuances and Credit Ratings
In Q3 2024, the company renewed and amended its $500 million revolving credit facility, which now expires on August 23, 2029. It includes an accordion feature that allows for an increase up to $1 billion. As of September 30, 2024, the company had no outstanding borrowings under this facility, maintaining an available borrowing capacity of $500 million. The company has maintained compliance with its financial covenants, including leverage and interest coverage tests.
Balancing Debt Financing and Equity Funding
The company has utilized its cash flow effectively, repurchasing 2,850,500 shares at a cost of $237.1 million in the first nine months of 2024. This strategy reflects its approach to balance between debt financing and equity funding, as evidenced by its free cash flow of $282.5 million in Q3 2024. The projected capital expenditures for 2024 are between $105 million and $115 million.
| Financial Metric | Value |
|---|---|
| Total Debt (as of Sep 30, 2024) | $119.7 million |
| Short-term Debt | $10.0 million |
| Long-term Debt | $109.7 million |
| Debt-to-Equity Ratio | 6.2% |
| Available Borrowing Capacity | $500 million |
| Total Shares Repurchased (Jan-Sep 2024) | 2,850,500 |
| Total Cost of Share Repurchases | $237.1 million |
| Free Cash Flow (Q3 2024) | $282.5 million |
| Projected Capital Expenditures (2024) | $105-$115 million |
Assessing A. O. Smith Corporation (AOS) Liquidity
Assessing A. O. Smith Corporation's Liquidity
Current Ratio: As of September 30, 2024, the current ratio was calculated as follows:
Current Assets: $1,412.5 million
Current Liabilities: $844.2 million
Current Ratio = Current Assets / Current Liabilities
Current Ratio = 1.67
Quick Ratio: The quick ratio can be determined using the following data:
Quick Assets (Current Assets - Inventories): $1,412.5 million - $554.9 million = $857.6 million
Quick Ratio = Quick Assets / Current Liabilities
Quick Ratio = 1.02
Analysis of Working Capital Trends
Working Capital as of September 30, 2024: $568.3 million
Working Capital as of December 31, 2023: $555.0 million
Change in Working Capital: $13.3 million increase
| Period | Working Capital (in millions) |
|---|---|
| September 30, 2024 | $568.3 |
| December 31, 2023 | $555.0 |
Cash Flow Statements Overview
Cash provided by operating activities:
- 2024: $359.9 million
- 2023: $439.0 million
Cash used in investing activities:
- 2024: ($111.1 million)
- 2023: ($30.8 million)
Cash used in financing activities:
- 2024: ($367.7 million)
- 2023: ($500.7 million)
Potential Liquidity Concerns or Strengths
As of September 30, 2024, cash and cash equivalents stood at $219.3 million, down from $339.9 million at the end of 2023. The cash flow from operations decreased due to higher incentive payments and increased inventory levels.
The company has a renewed revolving credit facility of $500 million with an option to increase to $1 billion under certain conditions. As of September 30, 2024, there were no borrowings under this facility, indicating strong liquidity management.
Debt levels decreased by $7.6 million in the first nine months of 2024, with a total debt to total capitalization ratio of 5.9% as of September 30, 2024, compared to 6.5% at December 31, 2023.
Is A. O. Smith Corporation (AOS) Overvalued or Undervalued?
Valuation Analysis
To assess whether the company is overvalued or undervalued, we will analyze key financial ratios, stock price trends, dividend yield, and analyst consensus.
Price-to-Earnings (P/E) Ratio
The P/E ratio is a crucial metric for evaluating valuation. As of the latest report, the diluted earnings per share (EPS) are $2.87 for the trailing twelve months. With the current stock price around $82.63, the P/E ratio can be calculated as follows:
P/E Ratio = Stock Price / EPS = $82.63 / $2.87 ≈ 28.8
Price-to-Book (P/B) Ratio
The P/B ratio is another important indicator. As of September 30, 2024, the book value per share is approximately $24.45. Using the current stock price:
P/B Ratio = Stock Price / Book Value per Share = $82.63 / $24.45 ≈ 3.38
Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
The EV/EBITDA ratio provides insight into the company's overall valuation. The enterprise value is calculated as market capitalization plus total debt minus cash. As of the latest report, the total debt is $124.4 million, and cash is $219.3 million. The estimated EBITDA for the last twelve months is $615.9 million. The calculations are as follows:
Market Capitalization = Stock Price Shares Outstanding = $82.63 147.3 million ≈ $12.18 billion
Enterprise Value = Market Capitalization + Total Debt - Cash = $12.18 billion + $124.4 million - $219.3 million ≈ $12.08 billion
EV/EBITDA Ratio = Enterprise Value / EBITDA = $12.08 billion / $615.9 million ≈ 19.6
Stock Price Trends
Over the last 12 months, the stock price has exhibited fluctuations. The stock price was approximately $78.00 a year ago and has risen to about $82.63, indicating a gain of approximately 6.76% during this period.
Dividend Yield and Payout Ratios
The company has declared a quarterly dividend of $0.34 per share, which annualizes to $1.36. Based on the current stock price, the dividend yield is calculated as follows:
Dividend Yield = Annual Dividend / Stock Price = $1.36 / $82.63 ≈ 1.65%
The payout ratio based on the diluted EPS of $2.87 is:
Payout Ratio = Annual Dividend / EPS = $1.36 / $2.87 ≈ 47.4%
Analyst Consensus on Stock Valuation
According to recent analyst reports, the consensus rating for the stock is a Hold, with a target price estimate of $85.00, suggesting a potential upside of about 2.2%.
| Metric | Value |
|---|---|
| P/E Ratio | 28.8 |
| P/B Ratio | 3.38 |
| EV/EBITDA Ratio | 19.6 |
| Current Stock Price | $82.63 |
| Stock Price 12 Months Ago | $78.00 |
| Dividend per Share | $0.34 |
| Annualized Dividend | $1.36 |
| Dividend Yield | 1.65% |
| Payout Ratio | 47.4% |
| Analyst Consensus | Hold |
| Target Price | $85.00 |
Key Risks Facing A. O. Smith Corporation (AOS)
Key Risks Facing A. O. Smith Corporation
As of 2024, A. O. Smith Corporation faces several internal and external risks that could significantly impact its financial health. Here’s a breakdown of these risks:
Industry Competition
The competitive landscape is intensifying, particularly in North America. The company reported a decrease in sales to $703.3 million in Q3 2024, down from $709.9 million in Q3 2023, reflecting pressures from competitors in the water heating and treatment sectors. The residential and commercial water heater volumes have declined, which affects overall revenue growth.
Regulatory Changes
The regulatory environment continues to evolve, particularly concerning environmental standards and product safety. Compliance with the Inflation Reduction Act of 2022, which imposes a nondeductible 1% excise tax on certain stock repurchases, adds financial strain. This may impact the company's ability to optimize capital allocation strategies.
Market Conditions
Market conditions, especially in China, are a significant concern. The company expects a decline in sales in China by 6% to 8% in local currency for 2024, primarily due to softening consumer demand. This decline is critical as the Rest of World segment's sales dropped to $210.3 million in Q3 2024 from $233.4 million in Q3 2023.
Operational Risks
Operational risks have emerged from increased production costs, which have outpaced pricing actions. The gross profit margin fell to 37.4% in Q3 2024, down from 38.0% in Q3 2023, driven by lower volumes and operational inefficiencies. The anticipated North America segment margin for 2024 is projected at 24.5%, a decline from previous margins.
Financial Risks
Financial risks include fluctuations in currency exchange rates that can adversely affect sales and profitability. In the first nine months of 2024, unfavorable currency translation impacted net sales by approximately $16 million. Additionally, total debt has decreased to $109.7 million as of September 30, 2024, but remains a factor to monitor closely.
Strategic Risks
The company has made significant acquisitions, which can introduce integration complexities and financial risks. In the first nine months of 2024, recent acquisitions contributed approximately $14 million in incremental net sales. However, the ability to successfully integrate these acquisitions remains a strategic challenge.
Mitigation Strategies
To address these risks, A. O. Smith Corporation has implemented several strategies:
- Enhancing operational efficiencies to counteract rising production costs.
- Expanding geographic presence in North America to mitigate risks associated with international markets.
- Maintaining a strong balance sheet with a leverage ratio of 5.9% as of September 30, 2024.
| Risk Factor | Current Status | Impact on Financials |
|---|---|---|
| Industry Competition | Sales decrease from $709.9 million to $703.3 million | Negative impact on revenue growth |
| Regulatory Changes | 1% excise tax on stock repurchases | Increased financial strain |
| Market Conditions | Expected sales decline in China by 6% to 8% | Potential revenue loss |
| Operational Risks | Gross profit margin fell to 37.4% | Lower operational efficiency |
| Financial Risks | Unfavorable currency translation impact of $16 million | Reduced profitability |
| Strategic Risks | Recent acquisitions contributed $14 million | Integration complexities |
Future Growth Prospects for A. O. Smith Corporation (AOS)
Future Growth Prospects for A. O. Smith Corporation
Analysis of Key Growth Drivers
The company is focusing on several key growth drivers, including product innovations, market expansions, and acquisitions. In 2024, the company expects to see an 8% increase in sales of boilers as they transition to higher-efficiency models. Additionally, sales of North America water treatment products are projected to increase by approximately 8% to 10% compared to 2023.
Future Revenue Growth Projections and Earnings Estimates
For 2024, consolidated sales are expected to be approximately flat compared to 2023, with projected earnings per share ranging between $3.70 and $3.85. In the first nine months of 2024, net sales reached $2.9057 billion, a 1.4% increase from $2.8647 billion in the same period of 2023.
Strategic Initiatives or Partnerships
The company has made strategic acquisitions in the water treatment sector, contributing approximately $6 million and $14 million to net sales in the third quarter and first nine months of 2024, respectively. The renewed $500 million revolving credit facility, expiring in 2029, provides financial flexibility to support ongoing initiatives.
Competitive Advantages
A. O. Smith Corporation benefits from a strong brand reputation and a comprehensive product portfolio. The North America segment's earnings were $162.5 million in the third quarter of 2024, indicating robust operational performance despite market challenges. The company's gross profit margin was 37.4% in Q3 2024, slightly down from 38.0% in Q3 2023, showcasing ongoing operational efficiencies.
| Segment | Net Sales (Q3 2024) | Segment Earnings (Q3 2024) | Segment Margin (Q3 2024) |
|---|---|---|---|
| North America | $703.3 million | $162.5 million | 23.1% |
| Rest of World | $210.3 million | $13.6 million | 6.5% |
Overall, the company is positioned well for future growth through ongoing strategic initiatives and leveraging its competitive advantages.
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Article updated on 8 Nov 2024
Resources:
- A. O. Smith Corporation (AOS) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of A. O. Smith Corporation (AOS)' financial performance, including balance sheets, income statements, and cash flow statements.
- SEC Filings – View A. O. Smith Corporation (AOS)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.