Top Picks 2017: Aaon Inc.

01/26/2017 6:00 am EST

Focus: STOCKS

Matthew Castel

Head of Strategy, Logos LP

This Top Pick is a small-cap manufacturer that sells premium heating, ventilating, and cooling equipment; it is recommended for the enterprising dividend growth investor, suggests Matthew Castel, money manager and editor of Logos LP Blog.

Aaon Inc. (AAON) is an Oklahoma-based, family-owned and operated firm, with 23.54% insider ownership. It is an excellent business to own for the long term.

This solutions provider is well positioned to capitalize on market opportunities such as energy efficiency and “green” features as they are a leader in both areas.

Their business segments are also diversified and well positioned to capture secular tailwinds in U.S. construction moving into 2017. 

This is an extremely well run business with operating margins sitting around 21%, which is higher then 88% of its peers.

Return on equity is sitting at 27.84% and ROA at 21.69% also heavily outperform peers. The company has no debt and has a healthy 33.65% return on invested capital and over 10.73% weighted average cost of capital. 

Shares in the company have decreased by over 15% over the past 10 years while book value per share has nearly tripled. Its 3 year average EPS growth is 19.70% which is ranked higher than 68% of companies operating in the same sector.

The industry median is about 5.0%, which is exceptional EPS growth for 3 years. As for revenue growth, Aaon is projected to grow from 6-10% in the face of an industry growing at about 2.7%. 

AAON pays a semi-annual cash dividend at a yield of about 0.80%, to which most dividend investors would find uninteresting.

Yet it is rare for small-cap stocks to pay dividends especially in light of that fact that AAON is more of a growth than a dividend stock. Nevertheless, they have a payout ratio of about 10.73%, which means there is much room for dividend growth. 

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