Reasonable P/E Ratio
Attractive Price-to-Sales Ratio
Strong Return on Equity
Healthy Profit Margins
Low Debt Levels
Strong Interest Coverage
Strong Market Position
Financial Discipline and Shareholder Returns
Innovative Product Pipeline
Focus on Growth in India
Strategic Restructuring in China
High P/FCF Ratio
Elevated EV/EBITDA Ratio
Moderate Operating Profit Margin
Low Cash Ratio
Quick Ratio Below 1
Declining Sales in Key Markets
Margin Pressure from New Product Launches
Muted Growth Expectations
Uncertainty in Chinese Market
Overall, A.O. Smith demonstrates strong business quality through its market position and commitment to shareholder returns, despite facing challenges from declining sales in key markets and margin pressures. Future prospects are cautiously optimistic, with growth potential in India and strategic restructuring efforts in China, although significant uncertainty remains.
Analysis Date: January 30, 2025
Last Updated: March 11, 2025
Trailing Twelve Months (TTM) values provide a view of the company's performance over the last year.
Benjamin Graham's value investing approach focuses on finding stocks with a significant margin of safety between their intrinsic value and market price.
Intrinsic Value
Estimated fair value based on Graham's formula
$140.94
Current Market Price: $61.04
IV/P Ratio: 2.31x (>1.0 indicates undervalued)
Margin of Safety
Gap between intrinsic value and market price
56.99999999999999%
Graham recommended a minimum of 20-30% margin of safety
Higher values indicate a greater potential discount to fair value
Graham Criteria Checklist
Benjamin Graham's value investing checklist for AOS
Positive earnings (5+ years)
Dividend history (5+ years)
P/E ratio ≤ 20 (16.93)
P/B ratio ≤ 1.5 (4.23)
Current ratio ≥ 2.0 (1.55x)
Long-term debt < Net current assets (0.42x)
Margin of safety (56.99999999999999%)
AOS does not meet all Graham criteria
Trailing Twelve Months (TTM) values provide a view of the company's performance over the last year.
A return on equity of 27.20% reflects very strong profitability and efficient use of equity capital, indicating that the company generates high returns for its shareholders.
Gross profit margin of 38.10% and net profit margin of 13.98% indicate robust profitability and effective cost management.
An operating profit margin of 18.74% is decent but could be improved, suggesting there may be room for operational efficiency enhancements.
Profitability metrics measure a company's ability to generate earnings relative to its revenue, operating costs, and other relevant metrics. Higher values generally indicate better performance.
Return on Equity (ROE)
Measures how efficiently a company uses its equity to generate profits
27.20%
Higher values indicate better returns for shareholders
TTM (as of 2025-04-16)
Return on Assets (ROA)
Measures how efficiently a company uses its assets to generate profits
3.39%
Higher values indicate better asset utilization
TTM (as of 2025-04-16)
Gross Profit Margin
Percentage of revenue retained after accounting for cost of goods sold
38.10%
Higher values indicate better efficiency in production
TTM (as of 2025-04-16)
Net Profit Margin
Percentage of revenue retained after accounting for all expenses
13.98%
Higher values indicate better overall profitability
TTM (as of 2025-04-16)
The debt-to-equity ratio of 0.10 and debt-to-assets ratio of 0.07 indicate a very strong balance sheet with minimal reliance on debt financing.
An interest coverage ratio of 106.78 shows that the company can comfortably meet its interest obligations, reflecting strong financial stability.
A cash ratio of 0.27 indicates that the company may not have sufficient cash reserves to cover its short-term liabilities in an emergency.
With a quick ratio of 0.96, the company is slightly below the ideal level, indicating potential liquidity concerns if short-term obligations become due.
Financial health metrics assess a company's ability to meet its financial obligations and its overall financial stability.
Debt to Equity Ratio
Total debt divided by total equity
0.10x
Lower values indicate less financial leverage and risk
Less than 1.0 is conservative, 1.0-2.0 is moderate, >2.0 indicates high risk
Q4 2024
Current Ratio
Current assets divided by current liabilities
1.55x
Higher values indicate better short-term liquidity
Less than 1.0 is concerning, 1.0-2.0 is adequate, greater than 2.0 is good
Q4 2024
A.O. Smith holds a leading position in the water heater and boiler markets, with a stable customer base that includes retail and wholesale partnerships. The company has a significant share of the replacement market, which constitutes 80-85% of their business.
The company has a solid track record of returning capital to shareholders, having returned nearly $1 billion through dividends and share repurchases over the past two years. In 2024, they returned $496 million to shareholders through dividends and stock buybacks.
A.O. Smith is investing in innovation with the launch of new products in the tankless water heater segment and has plans for further product development. Their focus on high-efficiency products positions them well for future market demands.
Sales decreased in 2024, particularly in China due to a weak economy and lower consumer demand. This decline raises concerns about their ability to maintain growth in challenging market conditions.
The transition of tankless product production from China to Mexico is expected to create a 50 basis point headwind on margins, indicating potential profitability challenges in the near term.
A.O. Smith anticipates mid-teen growth in its legacy Indian business, leveraging the recent acquisition of Pureit to expand their presence in the market. This positions them for long-term growth in a developing market.
The company is undergoing a restructuring process in China to streamline operations and reduce costs, with expected savings of approximately $15 million. This positions them to better compete in a challenging market.
A.O. Smith expects 2025 to be another year of relatively muted growth in both top and bottom lines due to flat industry growth in core markets and ongoing challenges in China.
The company faces uncertainty in the Chinese market, with projected sales declines of 5% to 8% in local currency due to ongoing economic challenges and low consumer confidence.