Editors Note:

I tried to launch this position on February 1st but the late January market rebound failed and began moving lower on the 2nd. This play was never triggered and eventually cancelled. After fading with the market this company is back at the January highs and I am recommending it again. Hopefully we will have better luck this time.

Charles Jeremiah Smith started a small business in 1874 in Milwaukee Wisconsin making hardware specialties. That small one person business has grown to more than 10,000 employees and is a global manufacturer.

His son Arthur Oliver Smith joined the business and developed a lightweight steel car frame. The company took off and sold those frames to Cadillac, Oldsmobile and Ford. The inventions that followed included a new way to weld steel that allowed the invention of a new pressure vessel. That started out in the energy sector but eventually found its way into water heaters and boilers. They pioneered the glass lined water heater that became the standard in the industry in 1936 and it remains the standard today.


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AOS - AO Smith - Company Description

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

With an AOS trade at $70.45

Buy April $75 call, currently $2.05. Stop loss $66.45.


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