A.O. Smith is a specialized water technology company and the leading manufacturer of water heaters in North America. Beyond the established North American water heater market, opportunities for growth exist in international markets and water treatment products. The company's stock has faced pressure since late 2024 due to weaker-than-expected sales in China, which represented 20% of total sales last year, along with sluggish water heater sales in North America. This trend of lackluster growth has persisted into 2025. Nevertheless, we consider A.O. Smith to be a high-quality company with a significant economic moat. The North American water heater and boiler segments, which account for approximately 70% of sales, benefit from strong brand intangible assets that have maintained robust profit margins, as well as a transportation-related cost advantage that deters potential foreign competitors in the tank-style water heater market. The difficult operating environment in China may weigh on the stock, despite the fact that China contributes less than 10% to profits. Additionally, the decline in North American water heater shipments in 2024 and management's projections for continued softness in 2025 have likely dampened investor enthusiasm for the stock. However, we anticipate that sales will grow at a mid-single-digit percentage rate, with earnings per share increasing by a high-single-digit to low-double-digit percentage from 2026 to 2029, driven by a rebound in demand for water heaters in North America, a recovery in the Chinese market, and the company's expansion in the water treatment sector.
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