Water heating and treatment solutions company A.O. Smith (NYSE: AOS) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 4.4% year on year to $942.5 million. On the other hand, the company’s full-year revenue guidance of $3.83 billion at the midpoint came in 1.7% below analysts’ estimates. Its GAAP profit of $0.94 per share was 3.3% above analysts’ consensus estimates.

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Steve Shafer, chief executive officer, stated, "In the third quarter, the A. O. Smith team achieved sales growth of 4%. The North America segment delivered 6% growth driven by the benefits of pricing actions implemented earlier this year to address increased costs in North America and continued demand resiliency for our commercial water heaters and boilers. This performance was partially offset by continued economic challenges in China, which experienced a 12% local currency sales decline in the quarter."

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

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. 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.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. 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 grew its revenue by 4.4% year on year, and its $942.5 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months. While this projection indicates 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 has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 18%. 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 rose by 1.1 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, A. O. Smith generated an operating margin profit margin of 18.6%, 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 13.8% 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. As we mentioned earlier, A. O. Smith’s operating margin was flat this quarter but expanded by 1.1 percentage points over the last five years. On top of that, its share count shrank by 13.3%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

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 36.7% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, A. O. Smith reported EPS of $0.94, up from $0.82 in the same quarter last year. This print beat analysts’ estimates by 3.3%. Over the next 12 months, Wall Street expects A. O. Smith’s full-year EPS of $3.71 to grow 11.9%.

Key Takeaways from A. O. Smith’s Q3 Results

It was encouraging to see A. O. Smith beat analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance missed and its full-year EPS guidance fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $67.99 immediately following the results.

The latest quarter from A. O. Smith’s wasn’t that good. One earnings report doesn’t define a company’s quality, though, so let’s explore whether the stock is a buy at the current price. If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.