cmannphoto/iStock via Getty Images
A.O. Smith (AOS) fell 3.5% in premarket trading Tuesday after analysts at UBS downgraded the maker of water heaters to Sell from a previous investment rating of Neutral. They said they expect the stock to underperform based on limited sales growth and growing competition in key markets such as North America and China.
A.O. Smith (AOS) was down 2.8% to $59.75 a share by 8:38 a.m. ET.
“North America headwinds include declining housing starts and commodity deflation (25% of water heaters indexed to steel), as well as market share bleed,” Damian Karas, analyst at UBS, said in a January 10 report. “The China business will face challenges from weaker property development … and inflationary pressures on consumers.”
GE Appliances is becoming a more significant competitor to the “water heater oligopoly” with its residential models, including high-efficiency gas and tankless models, according to UBS.
“We think the current environment of slowing demand, easing supply constraints, and softening materials prices should enable increasing competitiveness versus AOS/Rheem/Bradford White,” the report said.
In addition to lowering its earnings estimates for A.O. Smith (AOS), UBS cut its price target to $58 a share from $62 a share, based on a multiple of 16.5 times 2024 EPS estimates.
A.O. Smith (AOS) declined 26% in the 12 months through January 9, compared with a 10% drop for the Standard & Poor’s 400 midcap stock index (SP400).
