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A. O. Smith Corporation AOS has been benefiting from strong demand for water heater products and higher shipments in North America. The company expects North American boiler sales to increase by about 8-10% and North American water treatment sales to grow approximately 10-12% on a year-over-year basis in 2024. Also, the launch of kitchen appliance products in China has been boosting the performance of the Rest of the World business. For 2024, A. O. Smith expects overall sales to increase approximately 3-5% year over year.

The company intends to strengthen and expand its businesses through buyouts. In June 2022, the company acquired Atlantic Filter, boosting its position in the water treatment industry and strengthening its customer base in Florida and the adjacent regions. Also, the acquisition of Canada-based Giant Factories in October 2021 has expanded the company’s commercial and water heater offerings. The company spent $16.8 million on acquisitions in 2023.

A. O. Smith is committed to rewarding shareholders through dividend payouts and share repurchases. In 2023, the company paid out dividends of $183.5 million, up 3.6% year over year. In the same period, the company repurchased 4.4 million shares for approximately $306.5 million. In October 2023, it hiked its dividend by 7% to 32 cents per share. Also, its sound liquidity position adds to its strength. Exiting the fourth quarter of 2023, it had cash and cash equivalents of $339.9 million, higher than the current debt of $10 million.

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In the past six months, the Zacks Rank #3 (Hold) company has gained 18.4% compared with the industry’s 17.4% growth.

However, lower boiler sales in the North America segment have been a drag on A. O. Smith’s performance in 2023. It is worth noting that North America boiler sales decreased 12% year over year in 2023. Also, weakened consumer confidence in a challenged real estate and housing market in China may prove detrimental for A. O. Smith in the quarters ahead.

The escalating cost of sales poses a threat to A. O. Smith’s bottom line. In the fourth quarter of 2023, the company’s cost of sales increased 5.2% year over year to $618.3 million. Also, selling, general and administrative expenses rose 9.5% in the quarter. Any deleverage in costs, unless effectively counterbalanced by sales growth, might impact margins.

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