Comparing Babcock & Wilcox Enterprises, Inc. (BW) and A. O. Smith Corporation (AOS)

Babcock & Wilcox Enterprises, Inc. (NYSE:BW) shares are up more than 12.68% this year and recently increased 6.84% or $0.41 to settle at $6.40. A. O. Smith Corporation (NYSE:AOS), on the other hand, is up 2.37% year to date as of 02/13/2018. It currently trades at $62.73 and has returned 0.66% during the past week.

Babcock & Wilcox Enterprises, Inc. (NYSE:BW) and A. O. Smith Corporation (NYSE:AOS) are the two most active stocks in the Industrial Electrical Equipment industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.


Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect BW to grow earnings at a 12.50% annual rate over the next 5 years. Comparatively, AOS is expected to grow at a 15.00% annual rate. All else equal, AOS’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 19.6% for A. O. Smith Corporation (AOS). BW’s ROI is -19.40% while AOS has a ROI of 17.80%. The interpretation is that AOS’s business generates a higher return on investment than BW’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, BW’s free cash flow was -4.36% while AOS converted 0% of its revenues into cash flow. This means that, for a given level of sales, AOS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. BW has a current ratio of 1.20 compared to 2.30 for AOS. This means that AOS can more easily cover its most immediate liabilities over the next twelve months. BW’s debt-to-equity ratio is 0.73 versus a D/E of 0.27 for AOS. BW is therefore the more solvent of the two companies, and has lower financial risk.


BW trades at a forward P/E of 35.96, a P/B of 1.03, and a P/S of 0.19, compared to a forward P/E of 21.74, a P/B of 6.49, and a P/S of 3.56 for AOS. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. BW is currently priced at a 3.23% to its one-year price target of 6.20. Comparatively, AOS is -6.98% relative to its price target of 67.44. This suggests that AOS is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for BW and 2.30 for AOS, which implies that analysts are more bullish on the outlook for BW.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. BW has a short ratio of 7.40 compared to a short interest of 3.37 for AOS. This implies that the market is currently less bearish on the outlook for AOS.


A. O. Smith Corporation (NYSE:AOS) beats Babcock & Wilcox Enterprises, Inc. (NYSE:BW) on a total of 11 of the 14 factors compared between the two stocks. AOS , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. AOS is more undervalued relative to its price target. Finally, AOS has better sentiment signals based on short interest.

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