A. O. Smith (AOS): Buy, Sell, or Hold Post Q4 Earnings?

Over the last six months, A. O. Smith’s shares have sunk to $69.87, producing a disappointing 6% loss - a stark contrast to the S&P 500’s 3.1% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy A. O. Smith, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is A. O. Smith Not Exciting?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why AOS doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, A. O. Smith grew its sales at a tepid 5.8% compounded annual growth rate. This was below our standard for the industrials sector.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect A. O. Smith’s revenue to rise by 3.6%. Although this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.

3. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

A. O. Smith’s EPS grew at a weak 2.2% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

Final Judgment

A. O. Smith isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 17.6× forward P/E (or $69.87 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.

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