A.O. Smith Corp (AOS, Financial) saw a daily gain of 6.03%, despite a 3-month loss of 7.59%. With an Earnings Per Share (EPS) of 1.8, the question remains, is this stock fairly valued? This article seeks to shed light on this question by conducting an in-depth valuation analysis of A.O. Smith. We invite you to delve into this comprehensive assessment to gain a better understanding of A.O. Smith's intrinsic value and market position.
Company Overview
A.O. Smith Corporation is a renowned manufacturer and marketer of residential and commercial gas, gas tankless, and electric water heaters. The company also offers supplementary products such as water heating equipment, condensing and noncondensing boilers, and water system tanks. The company operates in two major geographic segments: North America, which contributes the majority of its total revenue, and the Rest of the World. A substantial portion of sales in North America comes from replacing existing products, utilizing a wholesale distribution channel and multiple selling locations. The Rest of the World segment predominantly sells in Asian countries and operates sales offices to expand distribution and market its product portfolio.
The company's stock price currently stands at $69.12, while its GF Value, an estimation of fair value, is $76.19. This comparison sets the stage for a deeper evaluation of the company's value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock, derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should be traded. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line represents the fair value at which the stock should be traded. The stock price is likely to fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
A.O. Smith (AOS, Financial) is estimated to be fairly valued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $69.12 per share, A.O. Smith stock is estimated to be fairly valued.
Because A.O. Smith is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. A.O. Smith has a cash-to-debt ratio of 1.77, which ranks better than 56.74% of 2855 companies in the Industrial Products industry. Based on this, GuruFocus ranks A.O. Smith's financial strength as 9 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. A.O. Smith has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.70 billion and Earnings Per Share (EPS) of $1.8. Its operating margin is 19.28%, which ranks better than 90.41% of 2900 companies in the Industrial Products industry. Overall, GuruFocus ranks the profitability of A.O. Smith at 8 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of A.O. Smith is 10.3%, which ranks better than 61.58% of 2738 companies in the Industrial Products industry. The 3-year average EBITDA growth rate is -16.1%, which ranks worse than 85.83% of 2427 companies in the Industrial Products industry.
ROIC vs. WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, A.O. Smith's return on invested capital is 34.79, and its cost of capital is 13.32.
Conclusion
In summary, the stock of A.O. Smith (AOS, Financial) is estimated to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks worse than 85.83% of 2427 companies in the Industrial Products industry. To learn more about A.O. Smith stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
