A. O. Smith Corporation (AOS): what the price requires
At today's price, A. O. Smith Corporation (AOS) is priced for -0.3% growth. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.
Generated: 2026-07-14 · Exported: 2026-07-16 · Source: https://boothcheck.com/report/AOS
Headline
| Field | Value |
|---|---|
| Ticker | AOS |
| Company | A. O. Smith Corporation |
| Current price | $59.43/sh |
| Composition | North America - Water heaters and related parts 64% / North America - Boilers and related parts 7% / North America - Water treatment products 6% / Rest of World - China 18% / Rest of World - All other Rest of World 5% / Inter-segment sales -1% |
What The Price Requires (Inversion)
The assumption today's price embeds, recovered by inverting the valuation.
| Field | Value |
|---|---|
| Inversion basis | whole-company |
| Operating margin needed | 9.9% |
| Operating margin today | 18.8% |
| Margin compression implied | -8.9pp |
| Implied growth | -0.3% |
| Multiple paid | 12x operating income |
The operating-margin requirement is derived from the framework's value band at year 12, a separately labeled basis from the headline growth/duration solve.
Solve inputs: computed at a 9.1% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~5.5pp.
How unusual the bet is: within-range
| Reference | Value |
|---|---|
| vs own history | -0.83σ |
| cohort percentile (of 210 peers) | 23 |
| implied end-window share | 0% |
Valuation X-Ray
The price is justified by relative-multiple and growth-DCF.
How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.
| Family | Median price/FV | Models | Reads |
|---|---|---|---|
| Asset | 1.45x | 5 | expensive |
| Earnings | 1.30x | 5 | expensive |
| Relative | 0.91x | 5 | justifies |
| Growth | 1.11x | 3 | expensive |
Families that justify the price: Relative, Growth
The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 8.6%); the inversion above states its own rate.
Per-Model Detail (n=18)
| Model | Family | FV | Price/FV | Applicable | Methodology |
|---|---|---|---|---|---|
| DCF Perpetual Growth | Growth | $53.49 | 1.11x | yes | FCF base $0.6B, growth 0% (input: historical growth), terminal g 0.5%, WACC 8.6%, 5yr projection |
| DCF Exit Multiple | Growth | $60.41 | 0.98x | yes | Exit EV/EBITDA: 9.0x / 11.0x / 13.0x (bear / base = today's held flat / bull), 5yr |
| Relative Valuation | Relative | $66.77 | 0.89x | yes | P/E 18x (static sector reference · 2026-04), scenarios: 15.3x / 18.0x / 20.7x (bear / base = reference held flat / bull), EV/EBITDA 12x |
| Simple DDM | Growth | — | — | no | — |
| Two-Stage DDM | Growth | — | — | no | — |
| Simple Excess Return | Asset | $40.99 | 1.45x | yes | BV/sh $13.49, ROE (TTM) 28.1%, ke 9.3% |
| Two-Stage Excess Return | Asset | $72.90 | 0.82x | yes | 5yr excess ROE then converge to ke=9.3% |
| Discounted Future Market Cap | Growth | $38.64 | 1.54x | yes | Rev $3.8B, growth 0% (input: historical growth; tapered), Terminal P/S: 1.8x / 2.2x / 2.5x (bear / base = today's held flat / bull, cap 8x) |
| Peter Lynch Fair Value | Relative | $45.00 | 1.32x | yes | EPS $3.75, growth 6% (input: historical EPS growth), PEG=2.64 (Overvalued) |
| Margin Trajectory | Growth | — | — | no | — |
| Earnings Power Value | Earnings | $38.85 | 1.53x | yes | Normalized EBIT (5y avg op income, one-time charges added back) $0.67B × (1−24%) / WACC 8.6% → EPV (no growth) |
| Residual Income | Asset | $61.84 | 0.96x | yes | BV $13.49 + 5yr PV of (ROE (TTM) 28.1% − Kₑ 9.3%) × BV; BV grows 8.8%/yr |
| Graham Number | Asset | $33.74 | 1.76x | yes | √(22.5 × EPS $3.75 × BVPS $13.49) — Graham's conservative floor |
| EV/EBITDA Relative | Relative | $65.14 | 0.91x | yes | EBITDA $0.79B × sector EV/EBITDA 12.0x |
| FCF Yield | Earnings | $46.91 | 1.27x | yes | FCF $647.5M / Kₑ 9.3% — zero-growth perpetuity |
| SBC-Adj FCF Yield | Earnings | $45.80 | 1.30x | yes | SBC-adj FCF $0.63B (FCF $0.65B − SBC $0.01B) capitalized at Kₑ |
| Ben Graham Formula | Earnings | $63.99 | 0.93x | yes | EPS $3.75 × (8.5 + 2×5.9%) × (4.4 / 5.3%) |
| ROIC-Justified P/B | Asset | $8.21 | 7.24x | yes | BV $13.49 × (ROIC 5.3% / WACC 8.6%) |
| P/Sales Sector | Relative | $68.48 | 0.87x | yes | Revenue $3.81B × sector P/S 2.5x |
| PEG Fair Value | Relative | $33.35 | 1.78x | yes | EPS $3.75 × (PEG 1.5 × growth 5.9% (input: historical EPS growth)) → PE 8.9x |
| Earnings Yield | Earnings | $40.54 | 1.47x | yes | EPS $3.75 / required return 9.3% (Rf 4.3% + ERP 5.0%) |
| Funds From Operations Multiple | Relative | — | — | no | — |
| Clinical Phase NPV | Growth | — | — | no | — |
| Merton | Asset | — | — | no | — |
| V5 Mechanical | — | — | — | no | — |
Solvency
| Field | Value |
|---|---|
| Net debt | $411.9m |
| Net debt / NOPAT (after-tax) | 0.74x |
| Net debt / operating income (pre-tax) | 0.57x |
| Interest coverage | 40.0x |
| Share count CAGR (buyback) | -3.2% |
| Burning cash | no |
Bullet Takeaways
- A. O. Smith runs a focused water-technology business where North American water heaters are roughly two-thirds of revenue, and that installed base throws off replacement demand year after year regardless of the housing cycle.
- The biggest specific risk is China, where first-quarter 2026 third-party sales fell 17% in local currency and management now guides the full year to a low-double-digit decline, dragging a segment that is close to a fifth of the company.
- Watch the October 2026 Department of Energy rule requiring all commercial water heaters to be condensing; the company's 10-K expects a pre-rule buy-ahead to lift 2026 commercial volumes, and the air-pocket after it is the swing factor for North American growth.
Bull Case
The single number that frames the bull case is the replacement cycle, not the growth rate. North American water heaters are about 64% of revenue, and the bulk of that demand is non-discretionary: a failed heater in a home or a commercial building gets replaced on a schedule the economy does not get to vote on. The 10-K describes a business that competes "in highly competitive markets" on product design, but the durable point is that the installed base is enormous and self-renewing. That is what lets a single-product-category manufacturer earn an 18.5% trailing operating margin and convert it into a balance sheet carrying almost no net leverage.
Regulation is the underappreciated tailwind. The company is selling into a forced equipment upgrade: its FY2025 10-K describes launching "a new commercial condensing water heater with advanced features ahead of the upcoming October 2026 Department of Energy (DOE) commercial rule that will require all commercial water heaters to be condensing." Condensing units carry higher content and higher price points than the standard equipment they replace, so the rule pulls the mix upward across the entire commercial channel. The filing expects "commercial water heater industry volumes will increase mid-single digits in 2026 after growing approximately five percent in 2025", with part of that from customers buying ahead of products being eliminated under the rule. A. O. Smith is positioned to capture both the buy-ahead and the higher-content replacement that follows.
Capital allocation does the quiet work the operating story sets up. The share count has fallen at about a 3.2% annual pace, which is buyback deployment showing up where it cannot be faked, and interest coverage near 40 times says the dividend and the repurchase program are funded out of cash flow rather than balance-sheet stretch. Against peers in the appliances cohort, A. O. Smith is the focused operator: Whirlpool spreads itself across the full kitchen-and-laundry range and absorbs its own warranty and trade-customer pressures, noting in its 10-K a customer base of "large, sophisticated trade customers who have many choices and demand competitive products, services and prices". A. O. Smith competes in a narrower lane where the replacement economics are steadier, and it returns the resulting cash rather than chasing breadth.
Bear Case
Start with the disconnect between what the price assumes and what the business is currently delivering, and lead with the observation rather than the ratio: today's price is the price of a steady compounder, and the most recent quarter looked nothing like steady. First-quarter 2026 EPS came in at $0.85 against a $0.95 consensus, revenue fell 2% year over year, and management cut full-year guidance to 2-4% sales growth and $3.60-$3.90 of diluted EPS. The market took the print as a downgrade of the franchise, not a weather blip.
China is the structural fault line. Third-party China sales fell 17% in local currency in the first quarter, and the company now expects a low-double-digit full-year decline there. China is close to 18% of revenue by the company's own composition, so a segment of that size shrinking at a double-digit rate is a real drag on the consolidated growth line, and it is a demand problem rather than a cost problem, which means cost actions cannot fix it. The 10-K's risk language frames the broader exposure plainly: failure "to adapt to the evolving competitive environment could materially and adversely affect our financial condition, results of operations and cash flows."
The cost side carries its own asymmetry. Steel is the primary raw material, and while "a portion of our customers are contractually obligated to accept price changes based on fluctuations in steel prices," only a portion is, which leaves the rest of the book exposed to input inflation and to tariff actions the company explicitly excludes from its guidance. The priced-in math tells the calibrated version of the bear: against the four families of valuation method, the price already sits above asset value (about 1.4 times) and above earnings power (about 1.3 times), and only relative peer multiples read it as cheap. This is not a deep-value setup waiting to re-rate. It is a quality name where the static methods say the premium is intact, so the downside is paid for by a stumble in the very North America and China volumes that the bull case needs to hold. JPMorgan's downgrade to Underweight with a $60 target is that argument in a sentence.
Valuation
What the price is betting is modest, which is the first thing to understand about A. O. Smith. Inverted, today's price embeds roughly flat company-wide operating growth, about negative 0.1% a year over a five-year window, against a company already earning an 18.5% operating margin. The bet is not that A. O. Smith accelerates. It is that the franchise simply holds its current economics, and the company's own recent results sit inside that range. The stretch in the assumption is duration, how long the steady state persists, rather than the rate.
The methods disagree in a telling pattern. The price sits above the asset-value lens by roughly 1.4 times and above the earnings-power methods by about 1.3 times, while the forward-growth methods land close to the price and the peer-multiple lens reads it slightly cheap, near 0.9 times. Read together, that says the market is paying a quality premium over book and over trailing earnings power, and is supported mainly by what peers fetch and by the forward methods that credit the steady replacement stream. It is not a price that any single conservative method validates on its own, and it is not a price that requires a growth heroics to defend either; it is a price that rests on the franchise being worth a premium to its hard book value, which for a focused, cash-generative manufacturer is a reasonable but not costless assumption.
Solvency removes the tail risk from the discussion. Net debt is about $412 million against trailing operating income near $706 million, a fraction of a single year's profit, and interest coverage near 40 times means debt service is a rounding item. The share count has fallen about 3.2% a year. The balance sheet is not where this story breaks; the downside lives entirely in the volume line, in whether North American replacement demand and the commercial buy-ahead hold while China keeps shrinking. The peer cohort sharpens the read: Whirlpool and the broader appliance group carry heavier trade-customer and warranty exposure, so A. O. Smith's premium to that group is the market paying for a cleaner, more focused book, not for faster growth.
Catalysts
The defining recent event is the first-quarter 2026 miss and the guidance cut. On April 30, A. O. Smith reported EPS of $0.85 against a $0.95 consensus and revenue of $946 million, down 2% year over year, then lowered full-year sales growth guidance to 2-4% and diluted EPS to $3.60-$3.90. The driver was China, where third-party sales fell 17% in local currency with the second quarter guided down roughly 15% sequentially, alongside weather-related disruption in North America.
Analyst sentiment turned with the print. JPMorgan downgraded the stock to Underweight from Neutral and cut its target to $60 from $65; Citigroup held Neutral and trimmed its target to $74 from $78 on April 13; Stifel kept a Buy but lowered its target to $78 from $85 on April 14. The consensus rating sits at Hold with an average target near $79. The cluster of target cuts without rating downgrades, JPMorgan aside, reads as the street marking down near-term estimates rather than abandoning the franchise.
The forward catalyst that matters most is regulatory. The company's 10-K points to the October 2026 Department of Energy rule requiring all commercial water heaters to be condensing, and expects mid-single-digit commercial volume growth in 2026 partly from buy-ahead demand "of products that will be eliminated as a part of the DOE regulatory change." The shape to watch is the handoff: a pull-forward into 2026 sets up a tougher comparison afterward, so the durability of commercial demand once the buy-ahead clears is the real question the next several prints will answer. Management's guidance explicitly excludes any outcome from its assessment of the China business and any changes to tariffs, so both remain open variables on top of the regulatory swing.
Peer Cohorts (Per Segment, With Filing Citations)
Core business (reported)
- LII (LENNOX INTERNATIONAL INC)
- (no filing in the citation store)
- CARR (CARRIER GLOBAL CORPORATION)
- (no filing in the citation store)
- JCI (JOHNSON CONTROLS INTERNATIONAL PLC)
- (no filing in the citation store)
- AAON (AAON, INC.)
- (no filing in the citation store)
- WTS (WATTS WATER TECHNOLOGIES INC)
- (no filing in the citation store)
- ZWS (ZURN ELKAY WATER SOLUTIONS CORPORATION)
- (no filing in the citation store)
- XYL (Xylem Inc.)
- (no filing in the citation store)
- WHR (WHIRLPOOL CORP /DE/)
- (no filing in the citation store)
Methodology Note
- Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
- Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
- Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
- Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.
Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.
Sources
A. O. Smith Q1 2026 results, April 30 2026 · JPMorgan analyst note, 2026 · analyst notes, April 2026 · MarketBeat AOS forecast, February 2026