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Water heating and treatment solutions company A.O. Smith (NYSE:AOS) beat analysts' expectations in Q2 CY2024, with revenue up 6.6% year on year to $1.02 billion. The company expects the full year's revenue to be around $4.01 billion, in line with analysts' estimates. It made a non-GAAP profit of $1.06 per share, improving from its profit of $1.01 per share in the same quarter last year.
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A. O. Smith (AOS) Q2 CY2024 Highlights:
- Revenue: $1.02 billion vs analyst estimates of $998.9 million (2.5% beat)
- EPS (non-GAAP): $1.06 vs analyst expectations of $1.06 (in line)
- Maintains full year revenue and EPS guidance vs. previously-provided outlook
- Gross Margin (GAAP): 38.7%, down from 40% in the same quarter last year
- Free Cash Flow of $34.5 million, down 59.2% from the previous quarter
- Market Capitalization: $13.03 billion
HVAC and Water SystemsTraditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Unfortunately, A. O. Smith's 5% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. A. O. Smith's recent history shows its demand slowed as its revenue was flat over the last two years.
This quarter, A. O. Smith reported solid year-on-year revenue growth of 6.6%, and its $1.02 billion of revenue outperformed Wall Street's estimates by 2.5%. Looking ahead, Wall Street expects sales to grow 3.1% over the next 12 months, a deceleration from this quarter.
Operating MarginRead More Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
A. O. Smith has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.1%. This isn't surprising as its high gross margin gives it a favorable starting point.
Looking at the trend in its profitability, A. O. Smith's annual operating margin rose by 5.1 percentage points over the last five years, showing its efficiency has significantly improved.
EPSRead MoreAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. A. O. Smith's EPS grew at a decent 9.5% compounded annual growth rate over the last five years, higher than its 5% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of A. O. Smith's earnings can give us a better understanding of its performance. As we mentioned earlier, A. O. Smith's operating margin expanded by 5.1 percentage points over the last five years. On top of that, its share count shrank by 12.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For A. O. Smith, its two-year annual EPS growth of 9.3% is similar to its five-year trend, implying stable earnings power.
In Q2, A. O. Smith reported EPS at $1.06, up from $1.01 in the same quarter last year. This print was close to analysts' estimates. Over the next 12 months, Wall Street expects A. O. Smith to grow its earnings. Analysts are projecting its EPS of $3.92 in the last year to climb by 7.4% to $4.21.
Key Takeaways from A. O. Smith's Q2 Results We enjoyed seeing A. O. Smith exceed analysts' revenue expectations this quarter. That the company maintained full year guidance for revenue and EPS means that A. O. Smith is on track. Investors were likely expecting more, however, and the stock traded down 2.4% to $86.73 immediately after reporting.
