A.O. Smith: Water heaters and fan motors, here and abroad

When you make products for builders, it's best if those products are as useful to the commercial side as the residential. There is a Milwaukee firm in that game that is doing well, despite the U.S. housing slowdown. Management attributes success to the firm's commercial exposure ... and its presence in international markets.

A.O. Smith Corporation (NYSE: AOS) manufactures and sells water heating equipment and electric motors. The Water Products segment makes a line of gas and electric water heaters, commercial water heating equipment, copper-tube boilers, and water systems tanks. The Electrical Products segment produces hermetic and fractional horsepower motors. The company sells its water heater products to plumbing wholesalers and retail outlets. Its motors go to original equipment manufacturers and distributors. The firm operates primarily in the U.S., Canada, Mexico and China. Sears Holdings (NASDAQ: SHLD) is a major retail client.

The company pleased investors last week, when it reported Q2 EPS of 81 cents and revenues of $611.5 million. Analysts had been looking for 73 cents and $606.8 million. Management also guided FY07 EPS to $2.85-$3.00, versus consensus of $2.86. The CEO cited continued strength in China and improved sales in global commercial markets for the solid results and favorable outlook.

The stock popped on the news and is now forming a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the stock with one "strong buy", two "buys" and three "holds". Analysts see a 20% growth rate, through the next year. The AOS P/E ratio (18.97), Price to Sales ratio (0.68), Price to Book ratio (2.14) and Price to Cash Flow ratio (10.59) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 70% of the outstanding shares. The stock is one of those used to calculate the S&P 600 SmallCap Index. Over the past 52 weeks, it has traded between $33.93 and $52.47. A stop-loss of $43.75 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.