Domestic Construction, Chinese Market Share Are Driving A.O. Smith's Growth, Analyst Says In Bullish Initiation

A. O. Smith Corp AOS, has solid execution skills and an attractive long-term growth profile, according to D.A. Davidson. 

The Analyst

Analyst Matt Summerville initiated coverage of A.O. Smith with a Buy rating and 12-18 month price target of $72, suggesting 12-percent upside.

The Thesis

A.O. Smith has a defensive backdrop, thanks to its exposure to a large, non-discretionary replacement market, Summerville said in a Wednesday note. (See the analyst's track record here.)

The water heater manufacturer is benefiting from favorable domestic construction markets, the analyst said.

Summerville also pointed to A.O. Smith's balance sheet optionality, as the company has about $2.35 per share in net cash.

The analyst said he views the company's significant presence in the Chinese market, especially in residential water heating, as a positive. This, along with other new products, positions the company to achieve sustained double-digit organic sales CAGR within the Chinese market, Summerville said. 

Citing the defensive nature of the company's business, Summerville said it is a sound name to own in the current market environment, while also allowing investors to "play offense."

Although D.A. Davidson projects a margin hit in the near term from a surge in domestic steel prices, the analyst expressed confidence that the company can offset inflation via price increases.

The firm recommended opportunistically adding to positions in A.O. Smith in the event of a pullback. 

The Price Action

A.O. Smith shares have gained about 25 percent over the past year through Wednesday.

The stock was up nearly 1 percent at $64.18 at the time of publication Thursday. 

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