The stock of A.O. Smith (NYSE:AOS, 30-year Financials) is estimated to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $68.94 per share and the market cap of $11.1 billion, A.O. Smith stock appears to be modestly overvalued. GF Value for A.O. Smith is shown in the chart below.
Because A.O. Smith is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 1.2% over the past three years and is estimated to grow 3.39% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. A.O. Smith has a cash-to-debt ratio of 4.68, which is better than 70% of the companies in Industrial Products industry. The overall financial strength of A.O. Smith is 8 out of 10, which indicates that the financial strength of A.O. Smith is strong. This is the debt and cash of A.O. Smith over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. A.O. Smith has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $3 billion and earnings of $2.41 a share. Its operating margin of 16.66% better than 87% of the companies in Industrial Products industry. Overall, GuruFocus ranks A.O. Smith’s profitability as strong. This is the revenue and net income of A.O. Smith over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. A.O. Smith’s 3-year average revenue growth rate is in the middle range of the companies in Industrial Products industry. A.O. Smith’s 3-year average EBITDA growth rate is -1.7%, which ranks in the middle range of the companies in Industrial Products industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, A.O. Smith’s return on invested capital is 23.66, and its cost of capital is 7.60. The historical ROIC vs WACC comparison of A.O. Smith is shown below:
To conclude, the stock of A.O. Smith (NYSE:AOS, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about A.O. Smith stock, you can check out its 30-year Financials here.
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