A.O. Smith is a leading water technology firm and the largest manufacturer of water heaters in North America. Beyond the mature North American water heater market, the company is pursuing growth opportunities in foreign markets, particularly in China and India, as well as in water treatment products. Since late 2024, the company's stock price has faced pressure due to weaker-than-expected sales in China, which represented 20% of total sales last year, alongside sluggish water heater sales in North America. This trend of lackluster growth has persisted into 2025.
Despite these challenges, we consider A.O. Smith to be a high-quality company with a strong economic moat. Approximately 70% of the firm's sales come from its North American water heater and boiler businesses, which benefit from brand intangible assets that support robust profit margins, as well as a transportation-related cost advantage that deters potential foreign competitors in the tank-style water heater segment. The difficult operating environment in China may weigh on the stock, even though this market contributes less than 10% to the company's profits. Additionally, the decline in North American water heater shipments in 2024, coupled with management's expectations for continued softness in 2025, has likely dampened investor enthusiasm for the stock.
Looking ahead, we anticipate that sales will grow at a mid-single-digit rate, with earnings per share increasing at a high single to low double-digit rate from 2026 to 2029. This growth is expected to be driven by a rebound in demand for water heaters in North America, a recovery in the Chinese market, and the expansion of the company's water treatment business. We believe that the entry of HVAC manufacturer Lennox into the North American water heater market through a joint venture with Ariston will not significantly alter the competitive landscape.
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