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Doug Silverman’s Senator Investment Group Boosts Its $AOS Stake

Doug Silverman’s Senator Investment Group recently disclosed a passive 5% stake in A.O. Smith Corp. (AOS). Silverman had 1.635 Million AOS shares at the end of March. He purchased an additional 300K shares on or before May 26th. He paid around $39.50-40 for these shares. AOS closed at $39.40 on Friday, so this is an opportunity for individual investors to mimick Silverman’s trade at a price similar to the one paid by the successful fund manager.

A. O. Smith Corporation (NYSE:AOS)

There are other fund managers with AOS holdings at the end of March. Chuck Royce’s Royce Associates had $25 Million in AOS, followed by Phill Gross‘ $21 Million position. Ken Brodkowitz’ Newland Capital, Cliff Asness’ AQR, and Alec Litowitz’s Magnetar also had smaller investments in AOS at the end of March.

Water heater maker AOS reported 88 cents per share in earnings for first quarter of 2011. A.O. Smith expects to earn between $1.90 and $2.10 form continuing operations in 2011. Analysts expect them to earn $2.07. AOS announced to sell its electrical products division for $700 Million in cash and 2.83 Million shares of Regal Beloit (RBC) which closed at $66.46 on Friday. AOS will receive  around $19 per share from this transaction. Excluding this, the stock trades at less than 10x analysts’ 2011 earnings expectations.

The company doesn’t plan to distribute the proceeds from the sale. Here is what they plan to do:

“We plan to take advantage of our strong balance sheet and the proceeds from the sale of Electrical Products Company to focus on a number of strategic initiatives. We will look to grow our core residential and commercial water heating and water treatment businesses in fast-growing geographic markets. We will continue to pursue acquisitions in China and India to leverage our brand and distribution capabilities as well as in markets such as Africa, Southeast Asia and South America. We will also explore the suitability of using our existing manufacturing platforms in China and India to export to smaller, yet fast growing, markets in Africa, the Middle East and Southeast Asia. We also intend to expand our core product line by looking at acquisitions, joint ventures or other business relationships that will allow us to expand our product offerings of boilers, heat pumps and other high efficiency products. Finally, we will pursue opportunities in new and unique technologies as well as water-themed adjacencies that will be attractive to our customers and channel partners and will leverage our core competencies to create shareholder value.”

AOS’ overall sales grew by 8% in 2010 mostly because of a 30% increase in sales in China. Company’s U.S. business isn’t very promising because of stagnant/declining real estate market. That’s why the management is planning to make acquisitions or engage in partnerships in developing countries.

Senator Investment Group was established in 2008 by Douglas Silverman and Alexander Klabin. The duo worked at York Capital Management before that. Klabin’s expertise is private investments, value investing, distressed debt and special situations. Silverman’s expertise is in event driven investing. Silverman also worked at Merrill Lynch as an investment banker in their leveraged finance department. He has a B.A. from Princeton in economics. They have more than $2.5 Billion in AUM.

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