A. O. Smith trades at $66.93 per share and has moved almost in lockstep with the market over the last six months. The stock has lost 10.6% while the S&P 500 is down 6.2%. This 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?
Despite the more favorable entry price, we're swiping left on A. O. Smith for now. Here are three reasons why there are better opportunities than AOS and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in HVAC and Water Systems companies should track organic revenue in addition to reported revenue. This metric gives visibility into A. O. Smith’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, A. O. Smith’s organic revenue averaged 1.1% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
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 2.6%. Although this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, A. O. Smith’s margin dropped by 7.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. A. O. Smith’s free cash flow margin for the trailing 12 months was 10.7%.
Final Judgment
A. O. Smith’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 17.4× forward P/E (or $66.93 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of A. O. Smith
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today.
