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A. O. Smith Corporation AOS is poised to gain from improving supply chains, which are driving shipments in North America and internationally. The company’s handsome rewards to shareholders add to its appeal.
Based in Milwaukee, WI, A. O. Smith is a leading manufacturer of commercial and residential water heating equipment and water treatment products. The company specializes in offering innovative, and energy-efficient solutions and products, which are developed and sold globally.
Let’s discuss the factors that should influence investors to retain the stock for the time being.
Growth Catalysts of AOS
Business Strength: AOS’ North America segment’s (revenues up 9% year over year in the second quarter) results benefited from increasing demand for residential and commercial water heaters and commercial boilers. Also, the introduction of tankless products bodes well for the segment. A. O. Smith expects sales from both the North America boiler and water treatment businesses to grow approximately 8-10% this year. Strength in the Rest of the World segment (revenues flat year over year in the second quarter) is driven by higher volumes of combi boilers and kitchen appliance products in China. Sales from India were particularly strong, jumping 16% year over year in the second quarter 2024quarter.
Expansion Efforts: The company solidifies its product portfolio and leverages business opportunities by adding assets. For instance, in July 2024, it signed a definitive deal to acquire the Pureit business from Unilever. The inclusion of Pureit’s expertise in water treatment solutions, coupled with its strong brand recognition, will enable A. O. Smith to expand its customer offerings and boost its position in the water treatment industry in India.
In March 2024, the company acquired the privately held Impact Water Products, which expanded its water treatment footprint in North America. The acquired company has been included in the North America segment. The June 2022 acquisition of Atlantic Filter boosted the company’s position in the water treatment industry and strengthened its customer base in Florida and the adjacent regions. The acquisition of Canada-based Giant Factories in October 2021 expanded its commercial and water heater offerings. The company spent $21.3 million on acquisitions in the first six months of 2024.
Rewards to Shareholders: AOS is committed to rewarding its shareholders handsomely through dividends and share buybacks. In the first six months of 2024, it paid dividends worth $94.2 million, up 4% year over year. In October 2023, A. O. Smith increased its dividend by 7% to 32 cents per share (annually: $1.28). The company has increased its dividend consecutively for more than 30 years. Last quarter, it had also repurchased 1.8 million shares for $153.2 million.
With 3.7 million shares left to be repurchased under the existing authorization, the company’s board boosted the buyback program by another 2 million shares. For 2024, it expects to repurchase shares worth approximately $300 million.
In the past year, this Zacks Rank #3 (Hold) company’s shares have gained 16.9% compared with the industry’s 10.1% growth.
Headwinds for AOS
Weakness in the Chinese Real Estate Market: Given the nature of its products, the company's fortunes are closely tied to the construction market. Therefore, the ongoing challenges in the Chinese real estate market are a concern for A. O. Smith. Decreasing demand for residential water treatment products in the region is challenging. As a result, the company lowered its 2024 third-party sales growth outlook for China. It expects the metric to be flat to up 3% in local currency.
Rising Expenses: Escalating expenses are a pressure on A. O. Smith’s bottom line. In 2023, the company’s selling, general and administrative (SG&A) expenses increased 8.4% year over year. The metric, as a percentage of sales, increased 80 basis points. The trend appears to be continuing this year, with both costs of sales and SG&A expenses remaining on an uptrend.
The company’s cost of sales was $628.3 million in the second quarter, up 9.1% year over year due to higher material costs. SG&A expenses were up 4.5% year over year. The increase was attributable to higher employee costs from increased wages and management incentives. The company's raw material costs primarily depend on steel prices, which are subject to fluctuations over time. It has been witnessing volatility in steel costs over the past several quarters. Any increase in cost that does not generate sales growth would directly impact margins and profitability.
Stocks to Consider
Better-ranked companies are discussed below.
Powell Industries, Inc. POWL currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
POWL delivered a trailing four-quarter average earnings surprise of 69.9%. In the past 60 days, the Zacks Consensus Estimate for Powell’s fiscal 2024 earnings has increased 32.9%.
Eaton Corporation plc ETN presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 4.7%.
In the past 60 days, the Zacks Consensus Estimate for ETN’s 2024 earnings has increased 2%.
Energous Corporation WATT currently carries a Zacks Rank of 2. Energous delivered a trailing four-quarter average earnings surprise of 10.3%.
In the past 60 days, the consensus estimate for WATT’s 2024 earnings has increased 5%.
Zacks Investment Research
Eaton (ETN) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.
Shares of this power management company have returned -0.4% over the past month versus the Zacks S&P 500 composite's +4% change. The Zacks Manufacturing - Electronics industry, to which Eaton belongs, has remained unchanged over this period. Now the key question is: Where could the stock be headed in the near term?
While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.
Earnings Estimate Revisions
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.
Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Eaton is expected to post earnings of $2.79 per share for the current quarter, representing a year-over-year change of +13%. Over the last 30 days, the Zacks Consensus Estimate has changed +0.5%.
The consensus earnings estimate of $10.74 for the current fiscal year indicates a year-over-year change of +17.8%. This estimate has changed +0.7% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $12.07 indicates a change of +12.4% from what Eaton is expected to report a year ago. Over the past month, the estimate has changed +1.1%.
Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Eaton is rated Zacks Rank #2 (Buy).
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.
For Eaton, the consensus sales estimate for the current quarter of $6.37 billion indicates a year-over-year change of +8.4%. For the current and next fiscal years, $25.14 billion and $27.18 billion estimates indicate +8.4% and +8.1% changes, respectively.
Last Reported Results and Surprise History
Eaton reported revenues of $6.35 billion in the last reported quarter, representing a year-over-year change of +8.3%. EPS of $2.73 for the same period compares with $2.21 a year ago.
Compared to the Zacks Consensus Estimate of $6.35 billion, the reported revenues represent a surprise of -0.02%. The EPS surprise was +4.6%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates two times over this period.
Valuation
No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.
While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Eaton is graded C on this front, indicating that it is trading at par with its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
Conclusion
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Eaton. However, its Zacks Rank #2 does suggest that it may outperform the broader market in the near term.
Zacks Investment Research
Investors interested in stocks from the Manufacturing - Electronics sector have probably already heard of Powell Industries (POWL) and Eaton (ETN). But which of these two stocks presents investors with the better value opportunity right now? Let's take a closer look.
Everyone has their own methods for finding great value opportunities, but our model includes pairing an impressive grade in the Value category of our Style Scores system with a strong Zacks Rank. The Zacks Rank favors stocks with strong earnings estimate revision trends, and our Style Scores highlight companies with specific traits.
Powell Industries has a Zacks Rank of #1 (Strong Buy), while Eaton has a Zacks Rank of #2 (Buy) right now. This means that POWL's earnings estimate revision activity has been more impressive, so investors should feel comfortable with its improving analyst outlook. But this is only part of the picture for value investors.
Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
POWL currently has a forward P/E ratio of 13, while ETN has a forward P/E of 26.85. We also note that POWL has a PEG ratio of 0.93. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. ETN currently has a PEG ratio of 2.21.
Another notable valuation metric for POWL is its P/B ratio of 4.28. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, ETN has a P/B of 5.96.
These are just a few of the metrics contributing to POWL's Value grade of B and ETN's Value grade of C.
POWL stands above ETN thanks to its solid earnings outlook, and based on these valuation figures, we also feel that POWL is the superior value option right now.
Zacks Investment Research
Here are three stocks with buy ranks and strong growth characteristics for investors to consider today, September 11:
Atour Lifestyle Holdings Limited ATAT: This hospitality management company carries a Zacks Rank #1, and has witnessed the Zacks Consensus Estimate for its current year earnings increasing 9.9% over the last 60 days.
Atour Lifestyle Holdings Limited Sponsored ADR Price and Consensus
Atour Lifestyle Holdings Limited Sponsored ADR price-consensus-chart | Atour Lifestyle Holdings Limited Sponsored ADR Quote
Atour Lifestyle Holdings has a PEG ratio of 0.46 compared with 1.52 for the industry. The company possesses a Growth Score of A.
Atour Lifestyle Holdings Limited Sponsored ADR PEG Ratio (TTM)
Atour Lifestyle Holdings Limited Sponsored ADR peg-ratio-ttm | Atour Lifestyle Holdings Limited Sponsored ADR Quote
Norwegian Cruise Line Holdings Ltd. NCLH: This cruise company carries a Zacks Rank #1, and has witnessed the Zacks Consensus Estimate for its current year earnings increasing 12.1% over the last 60 days.
Norwegian Cruise Line Holdings Ltd. Price and Consensus
Norwegian Cruise Line Holdings Ltd. price-consensus-chart | Norwegian Cruise Line Holdings Ltd. Quote
Norwegian Cruise Line Holdings has a PEG ratio of 0.22 compared with 1.52 for the industry. The company possesses a Growth Score of A.
Norwegian Cruise Line Holdings Ltd. PEG Ratio (TTM)
Norwegian Cruise Line Holdings Ltd. peg-ratio-ttm | Norwegian Cruise Line Holdings Ltd. Quote
Powell Industries, Inc. POWL: This custom equipment manufacturer carries a Zacks Rank #1, and has witnessed the Zacks Consensus Estimate for its current year earnings increasing 32.9% over the last 60 days.
Powell Industries, Inc. Price and Consensus
Powell Industries, Inc. price-consensus-chart | Powell Industries, Inc. Quote
Powell Industries has a PEG ratio of 0.92 compared with 1.40 for the industry. The company possesses a Growth Score of B.
Powell Industries, Inc. PEG Ratio (TTM)
Powell Industries, Inc. peg-ratio-ttm | Powell Industries, Inc. Quote
See the full list of top ranked stocks here.
Learn more about the Growth score and how it is calculated here.
Zacks Investment Research
Powell Industries, Inc. POWL shares have surged 86.9% over the past year, outpacing the Zacks Manufacturing - Electronics industry and the Industrial Products sector’s returns of 1.4% and 11.3%, respectively. The company has outperformed other industry players like Eaton Corporation ETN and Franklin Electric Co., Inc. FELE, which have returned 21.6% and 3.3%, respectively, over the same time frame.
Closing at $155.41 in the last trading session, the stock is trading below its 52-week high of $209.14 but significantly higher than its 52-week low of $72.51.
As a prominent electrical equipment manufacturer, POWL rides on its strong foothold and improving conditions in two key markets — oil and gas, and petrochemical. The company’s efforts to strengthen its project portfolio beyond the core oil and gas, and petrochemical end markets have also enhanced its market share across the utility, commercial and other industrial markets.
Powell’s diversification efforts have led to impressive growth in the backlog level, which was sturdy at $1.3 billion (exiting June 2024). Out of this backlog, the company expects to recognize $841 million as revenues by the end of third-quarter fiscal 2025 (ending June 2025). Courtesy of strength across its business, POWL has outperformed the S&P 500’s growth of 19.9% in the past year.
POWL Outperforms Industry, Sector & S&P500
Factors Favoring POWL
Powell’s third-quarter fiscal 2024 (ended June 2024) results indicated strong year-over-year growth, with revenues rising 50% to $288 million, driven by persistent strength and healthy levels of project activity across its oil and gas, and petrochemical markets. New orders totaled $356 million, which were spread broadly across its major markets. The bookings consist of a healthy volume of both small and medium-sized awards, reflecting the company’s core competencies and well-balanced portfolio across markets.
POWL’s revenues in the quarter were primarily driven by the strong performance from its largest markets, oil and gas, and petrochemical, which grew 56% and 158% year over year, respectively. Several favorable trends in oil and gas, and petrochemical markets hold promise for the company’s long-term growth.
This includes strength in the U.S. natural gas market that has been supporting solid investments in LNG, related gas processing and petrochemical processes. A strong pipeline of projects in the energy transition sector, including biofuels, carbon capture and hydrogen, has positioned POWL as a leading supplier of critical electrical infrastructure.
The company is also benefiting from increased demand for electrical power from data centers. Powell is strengthening its participation across the electrical power value chain and benefiting from solid momentum in data center and utility markets. The company witnessed strong bookings in electric utility and commercial markets in the first nine months of fiscal 2024 in the United States.
Powell’s capacity expansion initiatives, particularly at the product factory in Houston, bode well. The expansionary efforts have been enabling the company to better serve its customers with enhanced offerings across data centers, hydrogen, carbon capture and other transitional energy markets.
Given the strength across its businesses, the Zacks Consensus Estimate for POWL’s fiscal 2024 (ending September 2024) revenues is pegged at $1.01 billion, indicating 45% year-over-year growth.
Better Returns Than Industry
POWL’s trailing 12-month return on equity (“ROE”) is indicative of its growth potential. ROE for the trailing 12 months is 33.09%, much higher than the industry’s 10.01%, reflecting the company’s efficient use of shareholders’ funds.
Return on assets is 15.56%, also ahead of the industry’s 5.62%, indicating that Powell has been utilizing its assets efficiently to generate returns.
Stock Valuation
With a forward 12-month price-to-earnings ratio of 12.52X, which is well below the industry average of 21.44X, the POWL stock presents an attractive valuation for investors. Also, the stock is cheaper than its peer, Schneider Electric S.E. SBGSY, which is overvalued than the industry.
Price-to-Earnings (Forward 12 Months)
Northbound Earnings Estimates
Earnings estimates for Powell have been going up over the past 60 days, reflecting analysts’ optimism. The Zacks Consensus Estimate for fiscal 2024 and fiscal 2025 (ending September 2025) have been revised upward over the same time frame. As earnings estimates increase, the stock is likely to follow suit.
The Zacks Consensus Estimate for earnings for fiscal 2024 is pegged at $12.01, suggesting year-over-year growth of 191.5%. The same for fiscal 2025 is pinned at $12.44, indicating growth of 3.6%.
Should You Buy POWL Now?
Solid momentum across end markets, constant focus on project executions, capacity expansions and innovative product offerings position Powell favorably for robust growth in the quarters ahead.
POWL is well-positioned to deliver sustained growth and shareholders’ value with a favorable valuation compared with the industry and its peers, and strong earnings projections. We believe that the POWL stock is an ideal candidate for investors' portfolio addition. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Zacks Investment Research
Eaton Corporation plc ETN has collaborated with Tesla Inc. TSLA to boost home energy storage and solar installations. Per this collaboration, Tesla’s Powerwall will support Eaton’s new AbleEdge smart breakers and make it easier for homeowners to achieve intelligent load management that will help to optimize energy usage and extend the time of backup during a grid outage.
Utilizing the joint expertise and expansive installed base of Eaton and Tesla, these companies are bringing energy storage with load management solutions to the mainstream market. The consumers will be able to utilize dynamic, automated energy load management to intelligently extend available battery duration in case of an outage.
A transition is evident in the energy space and the operators are producing more electricity from renewable energy sources. Homeowners are looking to meet their energy needs from their own generation and not solely dependent on the grid for power supply. Eaton and Telsa will help homeowners and installers to achieve intelligent load management.
Eaton’s Everything as a Grid Assists Homeowners
Eaton’s Everything as a Grid approach supports the two-way flow of electricity, enabling homeowners to produce and consume renewable energy when they need it. For more than a century, power has flowed in one direction—from centralized power plants into homes. Courtesy of solar energy, homes can now act as energy hubs by producing their own power and sharing the excess to support the grid.
Eaton is creating flexible power systems that manage energy consumption in an integrated way and transform each home as an energy source. Electrification of nearly everything is increasing electricity demand and requires new ways to manage energy costs. More energy flowing bidirectionally, to and from the grid, will reduce the cost of energy for customers.
ETN has been developing low-cost new products for efficient energy usage. The company has laid out a 10-year plan that includes a $3 billion investment in R&D programs, which will allow the company to create sustainable products.
Eaton Expanding Operations
Eaton operates in several markets globally. Strategic acquisitions and joint ventures ("JV") allow the company to expand into new markets and enhance its revenue stream. The company completed two acquisitions in the second quarter of 2024, further strengthening its Electrical Americas and Electrical Global segment.
Eaton’s products are supplied to around 175 countries and the acquisition will further expand the operation and product offerings of the company. On June 10, 2024, Eaton formed a JV company with Malaysia-based SIA Engineering Company, which will inspect, test, repair, maintain, modify and overhaul Eaton-manufactured aircraft components installed on airframe and engine fuel systems and hydraulic systems.
Eaton’s Earnings Estimates Moving North
Riding on the back of strong performance in the first half of 2024, expanding operations and new product offerings, the company now projects adjusted earnings per share (EPS) in the range of $10.65-$10.75 for 2024, indicating an increase of 17% at the midpoint from the prior-year level. ETN raised its organic sales guidance for 2024 from 7-9% to 8-9%.
The Zacks Consensus Estimate for ETN’s 2024 and 2025 EPS has moved up 1.5% and 1.9%, respectively, in the last 60 days. The Zacks Consensus Estimate for 2024 EPS of Illinois Tool Works ITW, another operator in this space, has moved up by 0.2% in the past 60 days.
Eaton’s Shares Outperform Industry
Shares of Eaton have gained 23.2% in the past year compared with its industry’s growth of 4.6%.
Zacks Rank
Eaton currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
Zurn Elkay Water Solutions Corporation (ZWS) shares rallied 7.7% in the last trading session to close at $32. This move can be attributable to notable volume with a higher number of shares being traded than in a typical session. This compares to the stock's 2.1% loss over the past four weeks.
Zurn Elkay’s rally is primarily driven by optimism about the strong momentum in its water management business. Strength across the company’s commercial and institutional end markets, along with the growing popularity for water management solutions, bodes well.
This motion control and water management company is expected to post quarterly earnings of $0.32 per share in its upcoming report, which represents a year-over-year change of +10.3%. Revenues are expected to be $406.35 million, up 2% from the year-ago quarter.
While earnings and revenue growth expectations are important in evaluating the potential strength in a stock, empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For Zurn Water, the consensus EPS estimate for the quarter has remained unchanged over the last 30 days. And a stock's price usually doesn't keep moving higher in the absence of any trend in earnings estimate revisions. So, make sure to keep an eye on ZWS going forward to see if this recent jump can turn into more strength down the road.
The stock currently carries a Zacks Rank #2 (Buy).
Zurn Water is part of the Zacks Manufacturing - Electronics industry. A.O. Smith (AOS), another stock in the same industry, closed the last trading session 1.3% higher at $77.89. AOS has returned -4.2% in the past month.
A.O. Smith's consensus EPS estimate for the upcoming report has changed -0.5% over the past month to $0.94. Compared to the company's year-ago EPS, this represents a change of +4.4%. A.O. Smith currently boasts a Zacks Rank of #3 (Hold).
Zacks Investment Research
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