Smith AO Corporation (AOS)

Conclusion

Smith AO Corporation (AOS.US) makes residential and commercial water heaters, boilers, heat pumps and water treatment products, selling in North America, China, Europe and India. At a price of 65.20 USD on 9 November 2026, the company has a market capitalisation of 7.07 billion USD.

The verdict is undervalued. Today's multiples sit well below their own ten-year medians: the P/E is 14.3 against a median of 22.6, and EV/EBITDA is 9.9 against 14.9. The discounted cash flow gives 81.51 USD per share at a discount rate of 10.08%. The fair value band runs from 73.75 to 110.63 USD with a midpoint of 92.19 USD, a margin of safety of 41.4% at the current price. The reverse DCF implies growth of 1.9% a year, against five-year revenue growth of 5.8% and five-year free cash flow per share growth of 4.7%, so the price assumes less growth than the company has delivered.

The strongest numbers are ROIC of 22.1% against a WACC of 9.5%, free cash flow conversion of 113.6% over the last twelve months, and net debt to EBITDA of 0.63. The weakest are revenue growth of 0.7% a year over three years, current-year estimate revisions of -7.8% over 90 days, and a terminal value share of 51.0% in the DCF. A fall in margins or a further slowdown in sales would weaken the case.

Financial health

Financial health is green, held up by an Altman Z-score of 5.74 and interest coverage of 26.3, with no metric assessed as bad. At 30 September 2026, the current ratio was 1.64 and the quick ratio 0.98, so short-term obligations appear well covered. Net debt to EBITDA is 0.63 and debt to equity is 0.39. The Altman Z-score of 5.74 is in the safe zone; the Altman model was designed for manufacturers, and this company is one. Insolvency risk: low, about 0.2% by the estimate of the Ohlson model over one to two years, based on the 2025 statements.

Earnings quality

Earnings quality is green, supported by a Piotroski score of 8 out of 9 and by free cash flow conversion and a shrinking share count. Free cash flow conversion is 113.6% over the last twelve months and 106.2% over five years, and the accrual ratio is -2.2%, which means cash generation runs ahead of reported earnings. Stock-based compensation is 0.4% of revenue, and free cash flow after it is 546.5 million USD. The share count fell at a compound rate of 3.0% a year over five years, which reflects buybacks. The Beneish M-score is not available. The company beat earnings estimates in six of the last eight quarters, with an average surprise of 2.4%. The weak point is estimate revisions: current-year estimates are down 7.8% over 90 days, and next-year estimates are down 7.6%.

Profitability

Profitability is green, with ROIC of 22.1% against a WACC of 9.5%, which gives a ROIC minus WACC value of 12.6%. Gross margin is 38.6% against a ten-year median of 38.7%, operating margin is 17.6% against 17.3%, and net margin is 13.0% against 13.1%. Margins are close to their history, and operating margin stability is 7.4%. Return on equity is 27.1%. The 2025 DuPont split shows a net margin of 14.3%, an asset turnover of 1.22 and an equity multiplier of 1.69, so leverage explains only part of the return. ROIC's five-year median is 30.0%, above the current 22.1%.

Growth

Growth is green, driven mainly by earnings per share, while revenue growth is modest. Revenue compound growth is 0.7% over three years, 5.8% over five years and 4.2% over ten. Revenue grew in seven of the last ten years. Earnings per share compound at 37.2% over three years, 13.0% over five and 9.5% over ten. Free cash flow per share grew 23.7% over three years, 4.7% over five and 9.9% over ten. Earnings have therefore grown faster than sales, which points to margin, buyback and cash-flow gains rather than volume. The next-year earnings growth estimate is 9.6%.

Valuation

Valuation is green, held up by the verdict of undervalued and a margin of safety of 41.4%, with no metric assessed as bad. Today's P/E is 14.3 against a ten-year median of 22.6, a premium of -36.6%. EV/EBITDA is 9.9 against 14.9, a premium of -33.5%. P/FCF is 12.6 against 20.6, a premium of -38.7%. P/S is 1.86 against 3.02, a premium of -38.5%, and P/B is 3.88 against 5.90, a premium of -34.3%. The DCF gives 81.51 USD per share at a discount rate of 10.08%, and the fair value from historical multiples is 102.87 USD. The fair value band runs from 73.75 to 110.63 USD, with a midpoint of 92.19 USD. The DCF rests on a terminal value share of 51.0%. The reverse DCF implies growth of 1.9%, and the given comparison against five-year revenue growth is -3.9%. The dividend yield is 2.8%, the forward yield 2.3%, and the payout on free cash flow 35.5%.

Risks

The main weakness is slow revenue growth of 0.7% over three years. Earnings growth then depends on margins and buybacks rather than on sales volume, and a margin decline would narrow the gap between ROIC of 22.1% and WACC of 9.5%. Falling estimates could mean lower future earnings and a lower fair value. The terminal value share of 51.0% means about half of the DCF rests on years beyond the forecast, so a lower long-term growth assumption would reduce it materially. The Beneish M-score is not available. The analysis also has limits: it has no debt maturity schedule and no revenue by segment, so it cannot test refinancing risk or exposure to individual divisions.