AOS - Embedded Expectations Analysis - 2021 09 15
A. O. Smith Corporation (AOS:USA) currently trades above historical averages relative to UAFRS-based (Uniform) earnings, with a 22.3x Uniform P/E. At these levels, the market is pricing in bullish expectations for the firm, but management appears concerned about sales growth in China, the sustainability of production level improvements, and 2021 EPS guidance.Specifically, management may lack confidence in their ability to maintain sales growth in China, sustain month-on-month production level improvements, and meet 2021 EPS and cash flow guidance. Furthermore, they may have concerns about pricing in China, the impact on margins from lower volumes and social insurance, and the pace of the recovery in new construction amidst supply chain issues. Moreover, management may lack confidence in their ability to meet their water heater shipments target and sustain Q2 water heater sales in North America. Finally, they may be overstating the strength of their channel inventory position in China, as well as organic growth in North American water treatment.
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
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- 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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