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Will A. O. Smith (AOS) Disappoint This Earnings Season?

Zacks Equity Research

A. O. Smith Corporation AOS is scheduled to report fourth-quarter 2019 results on Jan 28, before market open.

The company delivered negative earnings surprise of 3.12%, on average, in the trailing four quarters, missing estimates thrice. In the last reported quarter, A. O. Smith posted earnings of 53 cents, which missed the Zacks Consensus Estimate of 54 cents by 1.85%.

In the past three months, the company’s shares have declined 8.5% against the industry’s growth of 10.4%.

Factors at Play

Weakness in China on account of lower consumer demand is expected to get reflected in A. O. Smith’s fourth-quarter top-line results. Also, the company has been witnessing weakness in the U.S. residential water heater industry, which is likely to have adversely impacted its sales in the quarter. In addition, it has been spending considerable resources for the development of innovative products, quality improvement of existing product and integrating advanced technological changes. This might have increased operating expenses and put pressure on margins.

Also, high capital expenditure incurred on account of A. O. Smith’s expansion initiatives is likely to get reflect in fourth-quarter results.The company expects corporate expenses to be approximately $46 million for 2019. This is expected to have put pressure on the company's fourth-quarter profitability.

Moreover, given the company’s diverse geographic presence, its operations have been subject to issues like unfavorable movement in foreign currencies, interest rates fluctuations and hyperinflation in some foreign countries. In the second and third quarter, the weaker Chinese currency adversely impacted sales by about $16 million and $6 million, respectively.  For 2019, A. O. Smith expects unfavorable movement in Chinese currency to have an adverse impact of about 4% on revenues. This might have hurt its business, particularly in China, in the fourth quarter as well.

Amid this backdrop, the Zacks Consensus Estimate for revenues from A. O. Smith's North America segment is currently pegged at $565 million, indicating 8.2% growth from the year-ago quarter’s reported number. The consensus estimate for revenues from Rest of the World stands at $221 million, suggesting a decline of 25.8%.

Earnings Whispers

According to our quantitative model, a stock needs to have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or at least 3 (Hold) to increase the odds of an earnings beat. But that is not the case here as we will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: A. O. Smith has an Earnings ESP of -3.10% as the Most Accurate Estimate is pegged at 58 cents, lower than the Zacks Consensus Estimate of 60 cents.

A. O. Smith Corporation Price and EPS Surprise

A. O. Smith Corporation Price and EPS Surprise

A. O. Smith Corporation price-eps-surprise | A. O. Smith Corporation Quote

Zacks Rank: A. O. Smith carries a Zacks Rank #4 (Sell).

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right mix of elements to beat estimates this earnings season:

Stanley Black & Decker, Inc. SWK has an Earnings ESP of +1.21% and a Zacks Rank of 3.You can see the complete list of today’s Zacks #1 Rank stocks here.

Rockwell Automation, Inc. ROK has an Earnings ESP of +1.36% and a Zacks Rank of 3.

Dover Corporation DOV has an Earnings ESP of +1.72% and a Zacks Rank #3.

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