AOS Stock Exhibits Strong Prospects Despite Persisting Headwinds

A. O. Smith Corporation AOS has solidified its product portfolio and leveraged business opportunities through asset additions. The company acquired the Pureit business from Unilever in November 2024. The inclusion of Pureit’s expertise in water treatment solutions, coupled with its strong brand recognition, expanded AOS’ customer offerings and boosted its position in the water treatment industry in India. In March 2024, the company acquired privately held water treatment company Impact Water Products, which boosted its water treatment footprint in North America. The acquired company is included in the North America segment.

In the first six months of 2025, the company paid dividends worth $97.5 million, up 3.5% year over year. In October 2024, it increased the quarterly dividend rate by 6% to 34 cents per share (annually: $1.36). The company has increased its dividend consecutively for more than 30 years. In the first six months, it also repurchased 3.8 million shares for $251.3 million. While exiting the second quarter, 3 million shares were left to be repurchased under the existing authorization. The company expects to repurchase shares worth approximately $400 million in 2025.

A. O. Smith’s focus on cost management and operational excellence is driving margin performance. In the second quarter of 2025, the gross margin increased 60 basis points year over year to 39.3%. This growth is supported by initiatives including the expansion of the AOS operating system, adoption of lean manufacturing practices and strategic product mix optimization, all aimed at enhancing efficiency, streamlining production schedules and improving profitability. Also, its 2024 restructuring actions are projected to generate about $15 million in annual savings in 2025, further contributing to margin expansion.

A. O. Smith has a sound liquidity position. At the end of the second quarter, the company had cash and cash equivalents of $177.9 million, much higher than the current debt of $19.2 million. This implies that it has sufficient cash to meet its short-term debt obligations.

Downsides of AOS

The ongoing challenges in the Chinese real estate market are a concern for A. O. Smith. Lower volumes of residential water treatment and water heater products in the region are challenging for the Rest of World segment. The segment’s revenues declined 2% year over year in the second quarter of 2025. A decline in orders for water heater products in the North America segment is also concerning. In the second quarter, the North America segment’s sales declined 1% year over year as higher boiler volumes were offset by lower volumes of residential water heaters.

A. O. Smith has a significant presence in Asian countries like China and India. Since its products are priced in the local currencies of these countries, any increase in the value of the U.S. dollar relative to the local currencies would impact its revenues and profitability. For example, adverse foreign currency movements lowered the Rest of the World segment’s revenues by $6 million in the first six months of 2025.

AOS’ Price Performance

In the past year, this Zacks Rank #3 (Hold) company’s shares have risen 6.9% compared with the industry’s 12% growth.

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This article originally published on Zacks Investment Research (zacks.com).

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