A. O. Smith CorporationAOSNYSE

Overview Intelligence Charts News Fundamentals Key Metrics TTM Financials Earnings Growth Rating Analysts Institutional Peers Historical

DCF Valuation

DCF Valuation Summary

Hold

Fair Value: $88.56 per share(market-calibrated)

+13.6%

Upside to Fair Value

Current

$77.93

Pure Model

$88.09

Fair Value

$88.56

Bull Case

$103.54

Bear Case

$72.67

Market Reality Check

Model Terminal Growth

2.25%

Market-Implied Growth

3.63%

Calibrated Growth

2.46%

Fair value uses 85% model / 15% market-implied terminal growth. Pure model: $88.09.

What's Driving This Ratingfor AOS

✓

CapEx already efficient

CapEx at 2.07% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

✓

Premium margins already priced in

EBIT margin of 25.69% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

→

Moderate revenue growth

Analyst consensus projects 3.45% revenue growth, fading to 2.25% by Year 10. Revenue reaches $5.1B (vs $3.8B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $70.66/share (12.5x terminal FCF) while exit multiple gives $105.53/share (25.7x terminal FCF). The 18x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 2.25% growth is more conservative. The base case averages both methods.

🎯

Market pricing in higher long-term growth

To justify $77.93, the market implies 3.63% perpetual growth — 138bps above the model's 2.25%. This suggests the market sees additional growth catalysts (AI, new products, market expansion) not captured in analyst estimates.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 70.13% indicates efficient cash generation. FCF reaches $999M by Year 10 (19.47% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.34

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)10.54%

Cost of Debt

Pre-tax Cost of Debt4.78%

Tax Rate23.62%

After-tax Cost of Debt3.65%

Equity Weight (E/V)98.27%

Debt Weight (D/V)1.73%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (98.27% × 10.54%) + (1.73% × 3.65%)

= 10.42%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$4.0B	$4.3B	$4.6B	$4.8B	$5.1B
EBIT	$1.0B	$1.1B	$1.2B	$1.2B	$1.3B
Tax	$240M	$260M	$279M	$291M	$311M
NOPAT	$778M	$841M	$901M	$942M	$1.0B
+ Depreciation	$82M	$89M	$95M	$100M	$106M
- Capex	$82M	$89M	$95M	$99M	$106M
- Δ NWC	$9M	$12M	$7M	$7M	$8M
Free Cash Flow	$768M	$829M	$894M	$935M	$999M
Discount Factor	0.906	0.743	0.609	0.500	0.371
Present Value	$696M	$616M	$545M	$467M	$371M

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$999M

Terminal Growth Rate2.25%

WACC10.42%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$12.5B

PV of Terminal Value$4.6B

Exit Multiple Method

Year 10 EBITDA$1.4B

Exit Multiple (EV/EBITDA)18.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$25.7B

PV of Terminal Value$9.5B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$5.3B

PV of Terminal Value$4.6B

Enterprise Value$9.9B

(-) Net Debt$18M

Equity Value$9.9B

Shares Outstanding140M

Price per Share$70.66

Exit Multiple Method

PV of Projected FCFs$5.3B

PV of Terminal Value$9.5B

Enterprise Value$14.8B

(-) Net Debt$18M

Equity Value$14.8B

Shares Outstanding140M

Price per Share$105.53

Pure Model Fair Value

$88.09

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.25%	1.75%	2.25%	2.75%	3.25%
8.42%	$104.39	$106.19	$108.29	$110.75	$113.68
9.42%	$94.47	$95.74	$97.18	$98.84	$100.76
10.42%	$86.14	$87.06	$88.09	$89.26	$90.59
11.42%	$79.01	$79.70	$80.46	$81.31	$82.26
12.42%	$72.82	$73.34	$73.92	$74.55	$75.25

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$72.67

-6.8% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 1.68

Base Case

$88.09

13.0% vs current

• Analyst consensus
• Terminal growth: 2.3%
• Beta: 1.34

Bull Case

$103.54

32.9% vs current

• +25% vs analyst consensus
• Terminal growth: 2.8%
• Beta: 1.14

Key Assumptions & Drivers• Industrials Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth3.45%

Year 3 Revenue Growth4.08%

Year 5 Revenue Growth2.25%

Year 7 Revenue Growth2.25%

Year 10 Revenue Growth2.25%

Terminal Growth Rate2.25%

Margin & Efficiency

Current EBIT Margin25.69%

Tax Rate23.62%

Historical Capex / Rev2.07%

NWC / Revenue6.97%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 18x EV/EBITDA (Industrials sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

Explore More

S&P 500 Screener

Filter and sort all 500 stocks

Market Movers

Today's biggest gainers and losers

Market Heatmap

Visual sector performance