Machinery Stocks

A.O.Smith Corporation Valuation – June 2016 $AOS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – March 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how A.O.Smith Corporation (AOS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): A. O. Smith Corporation operates its business through two segments, which include North America and Rest of World. The Company’s Rest of World segment primarily comprises China, Europe and India. The Rest of World segment supplies water heaters to the residential market in China with a range of product offering, including electric, gas, gas tankless, heat pump and solar units, as well as combi boilers. The Company’s North America segment serves residential and commercial end markets in North America with a range of products, including water heaters, boilers and other. Its North America segment also manufactures and globally markets specialty commercial water heating equipment, condensing and non-condensing boilers and water systems tanks. Primarily for Asia, its Rest of World segment also manufactures and markets water treatment products. The Company also markets in-home air purification products in China.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AOS – June 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $7,330,868,182 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.37 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 199.33% Pass
6. Moderate PEmg Ratio PEmg < 20 29.71 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.03 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.37 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.33 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

AOS value chart June 2016

EPSmg $2.82
MG Growth Estimate 7.27%
MG Value $64.88
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $40.84
MG Value based on 0% Growth $23.94
Market Implied Growth Rate 10.61%
Current Price $83.68
% of Intrinsic Value 128.97%

A. O. Smith Corp is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.9 in 2012 to an estimated $2.82 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.61% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

A. O. Smith Corp receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

AOS charts June 2016

Net Current Asset Value (NCAV) $2.85
Graham Number $36.28
PEmg 29.71
Current Ratio 2.37
PB Ratio 5.03
Current Dividend $0.81
Dividend Yield 0.97%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $1,425,900,000
Total Current Liabilities $602,000,000
Long-Term Debt $274,100,000
Total Assets $2,650,600,000
Intangible Assets $711,900,000
Total Liabilities $1,172,100,000
Shares Outstanding (Diluted Average) 88,905,000

Earnings Per Share History

Next Fiscal Year Estimate $3.48
Dec2015 $3.16
Dec2014 $2.28
Dec2013 $1.83
Dec2012 $1.71
Dec2011 $3.29
Dec2010 $1.21
Dec2009 $1.13
Dec2008 $0.90
Dec2007 $0.95
Dec2006 $0.82
Dec2005 $0.51
Dec2004 $0.39
Dec2003 $0.59
Dec2002 $0.62
Dec2001 $0.20
Dec2000 $0.42
Dec1999 $0.59
Dec1998 $0.61
Dec1997 $1.82
Dec1996 $0.46

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.82
Dec2015 $2.47
Dec2014 $2.11
Dec2013 $1.96
Dec2012 $1.90
Dec2011 $1.83
Dec2010 $1.07
Dec2009 $0.95
Dec2008 $0.81
Dec2007 $0.73
Dec2006 $0.61
Dec2005 $0.49
Dec2004 $0.47
Dec2003 $0.50
Dec2002 $0.46
Dec2001 $0.50
Dec2000 $0.69

Recommended Reading:

Other ModernGraham posts about the company

A.O. Smith Corp Valuation – November 2015 Update $AOS
A.O. Smith Corporation Analysis – Initial Coverage $AOS

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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