AOS - Embedded Expectations Analysis - 2020 08 11
A. O. Smith Corporation (AOS:USA) currently trades above corporate averages relative to UAFRS-based (Uniform) earnings, with a 24.2x Uniform P/E. At these levels, the market has expectations for profitability to remain flat, but management appears concerned about demand sustainability, declining sales, and structural costsSpecifically, management may be concerned about continued declines in demand for the majority of their products, declines in residential water heater orders, and the numerous suspensions of jobs. Furthermore, they may lack confidence in their ability to react when the markets open up, effectively change structural costs, and manage inventories effectively. Additionally, they may be downplaying concerns about the expected economic downturn's impact on new home construction, and they may be concerned about declining sales, particularly in China. Finally, they may be overstating the potential of water treatment services, and they may lack confidence in their ability to meet expected total savings and remain compliant with their credit facility covenants
A.O. Smith is comprised of North America and Rest of World reporting segments. The company's Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The company's Rest of World segment also manufactures and markets in-home air purification products in China. The company serves residential and commercial end markets in North America with a range of products including water heaters, boilers, water treatment products, and other.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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