Machinery Stocks

A.O. Smith Corp Valuation – January 2019 $AOS

Company Profile (excerpt from Reuters): Robert Half International Inc. is engaged in providing specialized staffing and risk consulting services. The Company provides staffing and risk consulting services through the divisions: Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, The Creative Group and Protiviti. The Company operates through three segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. The temporary and consultant segment provides specialized staffing in the accounting and finance, administrative and office, information technology, legal, advertising, marketing and Web design fields. The permanent placement segment provides full-time personnel in the accounting, finance, administrative and office, and information technology fields. The risk consulting segment provides business and technology risk consulting and internal audit services.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of AOS – January 2019

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 $6,620,378,658 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.16 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 114.11% Pass
6. Moderate PEmg Ratio PEmg < 20 23.59 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.51 Fail
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 2.16 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.22 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

EPSmg $1.95
MG Growth Estimate 12.75%
MG Value $66.31
Opinion Undervalued
MG Grade B+
MG Value based on 3% Growth $28.28
MG Value based on 0% Growth $16.58
Market Implied Growth Rate 7.55%
Current Price $46.01
% of Intrinsic Value 69.39%

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 Undervalued after growing its EPSmg (normalized earnings) from $1.05 in 2014 to an estimated $1.95 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 7.55% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into A. O. Smith Corp revealed the company was trading above its Graham Number of $23.34. The company pays a dividend of $0.56 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 23.59, which was below the industry average of 23.62, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.92.

A. O. Smith Corp performs fairly well in the ModernGraham grading system, scoring a B+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $1.92
Graham Number $23.34
PEmg 23.59
Current Ratio 2.16
PB Ratio 4.51
Current Dividend $0.56
Dividend Yield 1.22%
Number of Consecutive Years of Dividend Growth 20

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $1,598,700,000
Total Current Liabilities $738,900,000
Long-Term Debt $193,300,000
Total Assets $3,025,200,000
Intangible Assets $812,600,000
Total Liabilities $1,269,000,000
Shares Outstanding (Diluted Average) 172,085,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.52
Dec2017 $1.70
Dec2016 $1.85
Dec2015 $1.58
Dec2014 $1.14
Dec2013 $0.92
Dec2012 $0.86
Dec2011 $1.64
Dec2010 $0.61
Dec2009 $0.59
Dec2008 $0.45
Dec2007 $0.48
Dec2006 $0.41
Dec2005 $0.26
Dec2004 $0.20
Dec2003 $0.29
Dec2002 $0.31
Dec2001 $0.10
Dec2000 $0.21
Dec1999 $0.30
Dec1998 $0.31

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.95
Dec2017 $1.59
Dec2016 $1.45
Dec2015 $1.24
Dec2014 $1.05
Dec2013 $0.98
Dec2012 $0.95
Dec2011 $0.92
Dec2010 $0.54
Dec2009 $0.48
Dec2008 $0.41
Dec2007 $0.37
Dec2006 $0.31
Dec2005 $0.24
Dec2004 $0.23
Dec2003 $0.25
Dec2002 $0.23

Recommended Reading:

Other ModernGraham posts about the company

A.O. Smith Corp Valuation – March 2018 $AOS
Best Dividend Paying Stocks for Dividend Growth Investors – August 2017
Best Dividend Paying Stocks for Dividend Growth Investors – March 2017
Best Dividend Paying Stocks for Dividend Growth Investors – February 2017
Best Dividend Paying Stocks for Dividend Growth Investors – January 2017

Other ModernGraham posts about related companies

Parker-Hannifin Corp Valuation – January 2019 $PH
Dover Corp Valuation – January 2019 $DOV
Caterpillar Inc Valuation – November 2018 $CAT
Lindsay Corp Valuation – October 2018 $LNN
Lennox International Inc Valuation – October 2018 $LII
Standex International Corp Valuation – September 2018 $SXI
Lincoln Electric Holdings Inc Valuation – August 2018 $LECO
Regal Beloit Corp Valuation – August 2018 $RBC
Kennametal Inc Valuation – August 2018 $KMT
SPX Corp Valuation – August 2018 $SPXC

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top