A.O. Smith (AOS, Financial), a leading manufacturer of water heaters and boilers, is experiencing a significant decline in shares after issuing lower-than-expected Q3 EPS and revenue guidance, alongside a reduced FY24 outlook. Since its mixed Q2 results in late July, the company's business conditions have worsened, particularly in China, where sales are estimated to have dropped by 17% due to decreased volumes in water heating and treatment products.
- AOS had reaffirmed its FY24 sales guidance of a 3-5% increase after achieving record Q2 sales of $1.0 billion. The company was optimistic, citing stable North American water heater shipments driven by consistent replacement demand and pre-buy activity ahead of a March 1, 2024, price hike.
- However, AOS cautioned about ongoing economic challenges in China during the Q2 earnings release, which have now materialized, as shown by the sharp decline from a 2% sales increase in China last quarter.
- North America, accounting for about 75% of AOS's total sales, also saw a modest year-over-year decline in Q3 sales, with both residential and commercial water heater orders falling short of expectations. The company attributes this to higher-than-anticipated pre-buy activity earlier in the year.
- Consequently, AOS projects FY24 revenue between $3.8-$3.9 billion, indicating a 1% decline at the midpoint. Positively, North American water heater volumes are expected to improve quarter-over-quarter. Additionally, India remains a strong market with a 12% sales increase in local currency, following a 16% rise last quarter.
The primary issue is the impact of China's real estate market problems on AOS's business, compounded by high-interest rates in the U.S. However, potential economic stimulus in China and a downward trend in U.S. interest rates may boost sales later this year and into 2025.
