AO Smith Makes Me Hot

A.O. Smith Corporation (NYSE: AOS)
The company manufactures and markets residential and commercial gas, gas tankless and electric water heaters, specialty commercial water heating equipment, condensing and non-condensing boilers, water systems tanks, water treatment products primarily for the Asian market, and in-home air purification products. Listed competitors include Bradford-Qhite Corporation, Paloma Company Ltd, and Aerco International, Inc.

Future Value
My short-term (3-6 week hold) target price for the stock is $67.82, with an initial trailing stop at $64.66. My future (5 year hold) target price for the stock is $200, which is an average annual return of 41%. A prior five year hold of the stock would have returned an average of 58% per year. Please remember that any investment has the potential for loss and that past performance is no guarantee of future results.

Repatriation
The Tax Cuts and Jobs Act of 2017 significantly changes U.S. tax law by, among other things, reducing the U.S. federal corporate tax rate from 35% to 21%, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The law provides companies that have unremitted foreign earnings from investments in foreign subsidiaries and currently hold those earnings overseas, the opportunity to repatriate those earnings by paying a one-time net charge related to the taxation of those unremitted foreign earnings.

The Federal Accounting Standards Board (FASB) has determined that filers have a policy choice to account for this tax on either a period basis or a deferred tax basis. In addition, the FASB requires that companies include in their financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. It is important to note that income tax adjustments required on repatriated earnings will distort a companies earnings and consequently its fair value.

In the case of A.O. Smith Corporation the company included provisional charges for income tax expense of approximately $81.8 million resulting from the deemed repatriation tax on undistributed foreign earnings and the re-measurement of its deferred tax assets and liabilities to reflect the recently enacted 21 percent U.S. federal corporate income tax rate.

The effect of this increase in taxes, lowered Net Income After Taxes by 26%, changing earnings per share from what would have been $2.15 to an actual $1.67. The tax increase also impacted fair value, moving it from what would have been $42 to an actual $31.

Fair Warning
OVER VALUED The stock is currently trading at levels above my most recent $31 fair value estimate. Please See Linked Worksheet

Disclosure
I hold no shares of A.O. Smith Corporation in my portfolio.
Posted on 03/15/18