A.O. Smith Corp (AOS) announced in December 2010 that it was selling its Electrical Products segment to focus more on growing its water heating and water treatment businesses in fast-growing markets, such as China.
The company, which manufactures residential and commercial water heating equipment throughout North America and China, is based in Milwaukee and has a market cap of $1.94 billion.
The move may just pay off, given that analysts expect 18% EPS growth from the company over the next two years. It is a Zacks #2 Rank (Buy) stock.
Outlook
On December 13, A.O. Smith announced it had reached an agreement to sell its Electrical Products division to Regal Beloit Corporation (RBC) for $875 million.
A.O. Smith plans to use the proceeds from the sale to focus on growing its core residential and commercial water heating and water treatment businesses in the emerging markets, particularly China.
This comes as no surprise considering that the company has been experiencing double-digit growth in its businesses in Asia.
Management expects to earn between $1.90 and $2.10 per share in 2011. The Zacks Consensus Estimate is within guidance at $2.07, representing 18% EPS growth.
The 2012 consensus estimate is currently $2.45, also representing 18% growth. It is a Zacks #2 Rank (Buy) stock.
The company reports its results for the first quarter of 2011 on April 19. The Zacks Consensus Estimate is calling for earnings of 47 cents per share.
Fourth Quarter Results
A.O. Smith reported its results for the fourth quarter of 2010 on January 25.
Sales for the Water Products segment came in at $370.2 million, a 2% increase over the same quarter in 2009. This growth was fueled by a 15% increase in China water heater sales. Higher U.S. commercial volumes were partially offset by lower U.S. residential water heater volumes.
Meanwhile, the Electrical Products division rose 12% as all strategic business units witnessed higher sales.
Earnings per share came in at 46 cents, missing the Zacks Consensus Estimate by 8 cents, however.
Dividend
A.O. Smith has paid a dividend every year since 1940 and has a history of steadily increasing its dividend. Since 2000, the company has raised it an a compound annual rate of 4.9%.
It currently yields 1.3%.
A.O. Smith has a payout ratio of just 21%, so expect more dividend hikes in the future as long as earnings continue to grow.
Shares trade at a premium on earnings but a discount on book value compared to the industry averages. The stock is trading at 20.4x forward earnings compared to the industry average of 16.2x. Its price to book ratio of 2.2 is below the peer group multiple of 2.6, however.
Shares are also cheaper on a price to sales basis (1.0 vs. 1.5).
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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