Intrinsic value of A.O Smith Corporation - AOS

Previous Close

$45.12

  Intrinsic Value

$39.41

stock screener

  Rating & Target

hold

-13%

Previous close

$45.12

 
Intrinsic value

$39.41

 
Up/down potential

-13%

 
Rating

hold

We calculate the intrinsic value of AOS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 7.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.70
  5.63
  5.57
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.11
  5.09
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
  5.04
  5.03
Revenue, $m
  3,370
  3,559
  3,758
  3,965
  4,181
  4,407
  4,644
  4,892
  5,151
  5,423
  5,707
  6,005
  6,317
  6,644
  6,987
  7,347
  7,723
  8,119
  8,533
  8,968
  9,424
  9,902
  10,404
  10,931
  11,484
  12,063
  12,672
  13,311
  13,981
  14,685
Variable operating expenses, $m
  2,738
  2,888
  3,044
  3,208
  3,378
  3,557
  3,744
  3,939
  4,144
  4,358
  4,501
  4,736
  4,982
  5,240
  5,511
  5,794
  6,092
  6,403
  6,730
  7,073
  7,433
  7,810
  8,206
  8,621
  9,057
  9,515
  9,995
  10,499
  11,027
  11,582
Fixed operating expenses, $m
  48
  49
  50
  51
  52
  54
  55
  56
  57
  58
  60
  61
  62
  64
  65
  67
  68
  70
  71
  73
  74
  76
  78
  79
  81
  83
  85
  86
  88
  90
Total operating expenses, $m
  2,786
  2,937
  3,094
  3,259
  3,430
  3,611
  3,799
  3,995
  4,201
  4,416
  4,561
  4,797
  5,044
  5,304
  5,576
  5,861
  6,160
  6,473
  6,801
  7,146
  7,507
  7,886
  8,284
  8,700
  9,138
  9,598
  10,080
  10,585
  11,115
  11,672
Operating income, $m
  583
  622
  663
  706
  750
  797
  846
  897
  951
  1,007
  1,146
  1,208
  1,272
  1,340
  1,411
  1,486
  1,564
  1,646
  1,732
  1,822
  1,917
  2,016
  2,121
  2,230
  2,345
  2,466
  2,593
  2,726
  2,866
  3,012
EBITDA, $m
  717
  759
  803
  849
  897
  947
  1,000
  1,055
  1,112
  1,173
  1,236
  1,302
  1,372
  1,445
  1,521
  1,601
  1,685
  1,774
  1,866
  1,963
  2,065
  2,172
  2,285
  2,402
  2,526
  2,656
  2,792
  2,935
  3,086
  3,244
Interest expense (income), $m
  7
  12
  16
  20
  25
  30
  35
  40
  45
  51
  57
  63
  70
  77
  84
  91
  99
  107
  116
  125
  135
  145
  155
  166
  178
  190
  202
  216
  230
  244
  260
Earnings before tax, $m
  571
  606
  643
  681
  721
  762
  806
  852
  900
  950
  1,083
  1,138
  1,196
  1,256
  1,320
  1,387
  1,456
  1,530
  1,607
  1,688
  1,772
  1,861
  1,955
  2,053
  2,156
  2,264
  2,377
  2,496
  2,621
  2,753
Tax expense, $m
  154
  164
  174
  184
  195
  206
  218
  230
  243
  256
  292
  307
  323
  339
  356
  374
  393
  413
  434
  456
  479
  503
  528
  554
  582
  611
  642
  674
  708
  743
Net income, $m
  417
  443
  469
  497
  526
  556
  588
  622
  657
  693
  791
  831
  873
  917
  964
  1,012
  1,063
  1,117
  1,173
  1,232
  1,294
  1,359
  1,427
  1,499
  1,574
  1,653
  1,735
  1,822
  1,914
  2,010

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  3,246
  3,429
  3,620
  3,819
  4,028
  4,246
  4,474
  4,713
  4,963
  5,224
  5,498
  5,785
  6,086
  6,401
  6,731
  7,078
  7,441
  7,821
  8,221
  8,640
  9,079
  9,540
  10,023
  10,531
  11,063
  11,622
  12,208
  12,824
  13,469
  14,147
Adjusted assets (=assets-cash), $m
  3,246
  3,429
  3,620
  3,819
  4,028
  4,246
  4,474
  4,713
  4,963
  5,224
  5,498
  5,785
  6,086
  6,401
  6,731
  7,078
  7,441
  7,821
  8,221
  8,640
  9,079
  9,540
  10,023
  10,531
  11,063
  11,622
  12,208
  12,824
  13,469
  14,147
Revenue / Adjusted assets
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
  1.038
Average production assets, $m
  997
  1,054
  1,112
  1,174
  1,238
  1,305
  1,375
  1,448
  1,525
  1,605
  1,689
  1,778
  1,870
  1,967
  2,068
  2,175
  2,286
  2,403
  2,526
  2,654
  2,789
  2,931
  3,080
  3,236
  3,399
  3,571
  3,751
  3,940
  4,138
  4,347
Working capital, $m
  219
  231
  244
  258
  272
  286
  302
  318
  335
  352
  371
  390
  411
  432
  454
  478
  502
  528
  555
  583
  613
  644
  676
  711
  746
  784
  824
  865
  909
  955
Total debt, $m
  299
  379
  463
  551
  643
  739
  840
  945
  1,055
  1,171
  1,292
  1,418
  1,551
  1,690
  1,835
  1,988
  2,148
  2,316
  2,492
  2,677
  2,871
  3,074
  3,287
  3,511
  3,746
  3,992
  4,251
  4,522
  4,807
  5,106
Total liabilities, $m
  1,432
  1,512
  1,596
  1,684
  1,776
  1,873
  1,973
  2,078
  2,189
  2,304
  2,425
  2,551
  2,684
  2,823
  2,969
  3,121
  3,281
  3,449
  3,625
  3,810
  4,004
  4,207
  4,420
  4,644
  4,879
  5,125
  5,384
  5,655
  5,940
  6,239
Total equity, $m
  1,815
  1,917
  2,024
  2,135
  2,252
  2,374
  2,501
  2,634
  2,774
  2,920
  3,074
  3,234
  3,402
  3,578
  3,763
  3,956
  4,159
  4,372
  4,595
  4,829
  5,075
  5,333
  5,603
  5,887
  6,184
  6,497
  6,824
  7,168
  7,529
  7,908
Total liabilities and equity, $m
  3,247
  3,429
  3,620
  3,819
  4,028
  4,247
  4,474
  4,712
  4,963
  5,224
  5,499
  5,785
  6,086
  6,401
  6,732
  7,077
  7,440
  7,821
  8,220
  8,639
  9,079
  9,540
  10,023
  10,531
  11,063
  11,622
  12,208
  12,823
  13,469
  14,147
Debt-to-equity ratio
  0.160
  0.200
  0.230
  0.260
  0.290
  0.310
  0.340
  0.360
  0.380
  0.400
  0.420
  0.440
  0.460
  0.470
  0.490
  0.500
  0.520
  0.530
  0.540
  0.550
  0.570
  0.580
  0.590
  0.600
  0.610
  0.610
  0.620
  0.630
  0.640
  0.650
Adjusted equity ratio
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559
  0.559

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  417
  443
  469
  497
  526
  556
  588
  622
  657
  693
  791
  831
  873
  917
  964
  1,012
  1,063
  1,117
  1,173
  1,232
  1,294
  1,359
  1,427
  1,499
  1,574
  1,653
  1,735
  1,822
  1,914
  2,010
Depreciation, amort., depletion, $m
  134
  137
  140
  143
  146
  150
  154
  158
  162
  166
  90
  95
  99
  105
  110
  116
  122
  128
  134
  141
  148
  156
  164
  172
  181
  190
  200
  210
  220
  231
Funds from operations, $m
  551
  579
  609
  640
  672
  706
  742
  779
  818
  859
  880
  925
  972
  1,022
  1,074
  1,128
  1,185
  1,245
  1,307
  1,373
  1,442
  1,515
  1,591
  1,671
  1,754
  1,842
  1,935
  2,032
  2,134
  2,241
Change in working capital, $m
  12
  12
  13
  13
  14
  15
  15
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  34
  36
  38
  40
  42
  44
  46
Cash from operations, $m
  539
  567
  596
  627
  658
  692
  727
  763
  802
  842
  862
  906
  952
  1,000
  1,051
  1,104
  1,160
  1,219
  1,280
  1,345
  1,413
  1,484
  1,558
  1,636
  1,719
  1,805
  1,895
  1,990
  2,090
  2,195
Maintenance CAPEX, $m
  -50
  -53
  -56
  -59
  -62
  -66
  -69
  -73
  -77
  -81
  -85
  -90
  -95
  -99
  -105
  -110
  -116
  -122
  -128
  -134
  -141
  -148
  -156
  -164
  -172
  -181
  -190
  -200
  -210
  -220
New CAPEX, $m
  -55
  -56
  -59
  -61
  -64
  -67
  -70
  -73
  -77
  -80
  -84
  -88
  -92
  -97
  -101
  -106
  -112
  -117
  -123
  -129
  -135
  -142
  -149
  -156
  -164
  -172
  -180
  -189
  -198
  -208
Cash from investing activities, $m
  -105
  -109
  -115
  -120
  -126
  -133
  -139
  -146
  -154
  -161
  -169
  -178
  -187
  -196
  -206
  -216
  -228
  -239
  -251
  -263
  -276
  -290
  -305
  -320
  -336
  -353
  -370
  -389
  -408
  -428
Free cash flow, $m
  434
  458
  481
  506
  532
  559
  587
  617
  648
  680
  692
  728
  765
  804
  845
  888
  933
  980
  1,030
  1,082
  1,136
  1,194
  1,254
  1,317
  1,383
  1,452
  1,525
  1,602
  1,682
  1,767
Issuance/(repayment) of debt, $m
  77
  81
  84
  88
  92
  96
  101
  105
  110
  115
  121
  127
  133
  139
  146
  153
  160
  168
  176
  185
  194
  203
  213
  224
  235
  246
  259
  271
  285
  299
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  77
  81
  84
  88
  92
  96
  101
  105
  110
  115
  121
  127
  133
  139
  146
  153
  160
  168
  176
  185
  194
  203
  213
  224
  235
  246
  259
  271
  285
  299
Total cash flow (excl. dividends), $m
  511
  538
  566
  594
  624
  655
  688
  722
  758
  796
  813
  854
  898
  943
  991
  1,041
  1,093
  1,148
  1,206
  1,267
  1,330
  1,397
  1,467
  1,540
  1,618
  1,699
  1,784
  1,873
  1,967
  2,066
Retained Cash Flow (-), $m
  -98
  -102
  -107
  -112
  -117
  -122
  -128
  -133
  -140
  -146
  -153
  -160
  -168
  -176
  -185
  -194
  -203
  -213
  -223
  -234
  -246
  -258
  -270
  -284
  -298
  -312
  -328
  -344
  -361
  -379
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  413
  436
  459
  483
  507
  533
  560
  589
  618
  649
  660
  694
  730
  767
  806
  847
  890
  935
  983
  1,032
  1,085
  1,139
  1,197
  1,257
  1,320
  1,386
  1,456
  1,529
  1,606
  1,687
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  396
  399
  399
  397
  393
  387
  379
  368
  355
  340
  313
  296
  277
  257
  237
  215
  194
  172
  151
  131
  112
  95
  78
  64
  51
  40
  31
  24
  18
  13
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

A. O. Smith Corporation operates through two segments: North America and Rest of World. The Company's Rest of World segment primarily consists of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water heaters, as well as water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Its North America segment manufactures and globally markets specialty commercial water heating equipment, condensing and non-condensing boilers and water systems tanks. It also manufactures and markets in-home air purification products in China. It serves residential and commercial end markets in North America with a range of products, which include water heaters, boilers and other. It supplies water heaters to the residential market in China with a broad product offering, including electric, gas, gas tankless, heat pump and solar units, as well as combi boilers.

FINANCIAL RATIOS  of  A.O Smith Corporation (AOS)

Valuation Ratios
P/E Ratio 23.9
Price to Sales 2.9
Price to Book 5.2
Price to Tangible Book
Price to Cash Flow 17.5
Price to Free Cash Flow 21.4
Growth Rates
Sales Growth Rate 5.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 11%
Cap. Spend. - 3 Yr. Gr. Rate -3.7%
Financial Strength
Quick Ratio 108
Current Ratio 0
LT Debt to Equity 20.9%
Total Debt to Equity 21.4%
Interest Coverage 67
Management Effectiveness
Return On Assets 12%
Ret/ On Assets - 3 Yr. Avg. 10.6%
Return On Total Capital 18.5%
Ret/ On T. Cap. - 3 Yr. Avg. 16.3%
Return On Equity 22.1%
Return On Equity - 3 Yr. Avg. 19.2%
Asset Turnover 1
Profitability Ratios
Gross Margin 41.7%
Gross Margin - 3 Yr. Avg. 39.3%
EBITDA Margin 19.9%
EBITDA Margin - 3 Yr. Avg. 17.8%
Operating Margin 17.2%
Oper. Margin - 3 Yr. Avg. 15.1%
Pre-Tax Margin 17.2%
Pre-Tax Margin - 3 Yr. Avg. 15.1%
Net Profit Margin 12.2%
Net Profit Margin - 3 Yr. Avg. 10.7%
Effective Tax Rate 29.4%
Eff/ Tax Rate - 3 Yr. Avg. 28.9%
Payout Ratio 25.7%

AOS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AOS stock intrinsic value calculation we used $3188 million for the last fiscal year's total revenue generated by A.O Smith Corporation. The default revenue input number comes from 0001 income statement of A.O Smith Corporation. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AOS stock valuation model: a) initial revenue growth rate of 5.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AOS is calculated based on our internal credit rating of A.O Smith Corporation, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of A.O Smith Corporation.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AOS stock the variable cost ratio is equal to 81.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $47 million in the base year in the intrinsic value calculation for AOS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for A.O Smith Corporation.

Corporate tax rate of 27% is the nominal tax rate for A.O Smith Corporation. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AOS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AOS are equal to 29.6%.

Life of production assets of 18.8 years is the average useful life of capital assets used in A.O Smith Corporation operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AOS is equal to 6.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1717 million for A.O Smith Corporation - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 167.771 million for A.O Smith Corporation is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of A.O Smith Corporation at the current share price and the inputted number of shares is $7.6 billion.

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