Water heating and treatment solutions company A.O. Smith (NYSE: AOS) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, but sales fell by 1.3% year on year to $1.01 billion. The company’s full-year revenue guidance of $3.89 billion at the midpoint came in 0.9% above analysts’ estimates. Its GAAP profit of $1.07 per share was 7.1% above analysts’ consensus estimates.

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Company Overview

Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE: AOS) manufactures water heating and treatment products for various industries.

Revenue Growth

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, A. O. Smith’s sales grew at a mediocre 6.4% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. A. O. Smith’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, A. O. Smith’s revenue fell by 1.3% year on year to $1.01 billion but beat Wall Street’s estimates by 1.2%.

Looking ahead, sell-side analysts expect revenue to grow 4.3% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

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Operating Margin

A. O. Smith’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 18% over the last five years. This profitability was elite for an industrials business thanks to its efficient cost structure and economies of scale. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, A. O. Smith’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, A. O. Smith generated an operating margin profit margin of 20.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

A. O. Smith’s EPS grew at a remarkable 14.5% compounded annual growth rate over the last five years, higher than its 6.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into A. O. Smith’s quality of earnings can give us a better understanding of its performance. A five-year view shows that A. O. Smith has repurchased its stock, shrinking its share count by 12.1%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For A. O. Smith, its two-year annual EPS growth of 41.4% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q2, A. O. Smith reported EPS at $1.07, up from $1.06 in the same quarter last year. This print beat analysts’ estimates by 7.1%. Over the next 12 months, Wall Street expects A. O. Smith’s full-year EPS of $3.59 to grow 10.7%.

Key Takeaways from A. O. Smith’s Q2 Results

It was good to see A. O. Smith narrowly top analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance slightly exceeded Wall Street’s estimates. On the other hand, its EBITDA slightly missed and EPS guidance was only in line. Overall, this print was mixed. Investors were likely hoping for more, and shares traded down 1.1% to $70.51 immediately following the results.

Is A. O. Smith an attractive investment opportunity right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.