UPDATE 3-A.O. Smith Q3 profit soars, shares fall on cost worries

* Q3 adj EPS $0.99 vs est $0.69

* Rev falls 17 pct

* Raises FY09 earnings outlook

* Shares fall 5 pct (Recasts; Adds details from conference call, analyst comments, updates share movement)

By Bhaswati Mukhopadhyay

BANGALORE, Oct 16 (Reuters) - Water heater and electric motor maker A.O. Smith Corp (AOS.N) reported a quarterly profit that beat market expectations, but shares of the company fell 5 percent as investors were concerned about rising raw material costs.

The company, whose end markets are mainly the residential and commercial construction industries, said it has seen significant rise in raw material costs in the last few months.

Steel prices have gone up 30 percent to 40 percent after reaching their lows in the second quarter, said the company, whose key raw materials are copper and steel.

It expects rising raw material costs to pressure fourth-quarter margins on a sequential basis, Chief Executive Paul Jones said, adding that the company sees sequential softness in sales in the quarter.

Analysts said the margins growth that the company saw in the third quarter may not be sustainable.

Investors recognize that the 400 basis points rise in margins for the quarter, along with the earnings growth that the company has seen, is one time in nature, analyst Paul Mammola of Sidoti & Co said.

"We expect our commercial volumes will continue to decline into 2010 as well," the CEO said on a conference call.

Sidoti's Mammola said commercial volume will probably be down about 10 percent in 2009, "with plenty of decline in 2010."

Comparisons will get difficult next year for the company, whose products include copper-tube boilers and water heating equipment, Mammola said.

"We remain concerned about the economic recovery, particularly in the housing and commercial construction markets," CEO Jones said.

RAISES FY09 EPS VIEW

However, based on its performance of the first three quarters, the company raised its full-year earnings outlook.

A.O. Smith, which is No. 3 in the HVAC (heating, ventilation and air conditioning) motor market after Emerson Electric Co (EMR.N) and Regal-Beloit Corp (RBC.N), now sees 2009 earnings of $2.60 and $2.75 per share, excluding items.

It earlier forecast earnings of $2.05 to $2.25 a share, excluding items. Analysts on average were expecting earnings of $2.33 a share, according to Thomson Reuters I/B/E/S.

Analyst Michael Schneider of Robert W. Baird, however, said although the company raised its full-year outlook, its fourth quarter will be below market expectations.

"This implies fourth-quarter earnings of 39 cents to 54 cents per share versus the consensus estimate of 55 cents and our estimate of 62 cents," Schneider said.

For the third quarter, net income attributable to the company rose to $34.6 million, or $1.14 a share, from $5.8 million, or 61 cents a share, a year ago.

Excluding items, the company earned 99 cents a share, helped partly by temporary fall in raw material costs and growth in China. Analysts were expecting earnings of 69 cents a share.

Revenue for the company fell 17 percent to $501.5 million. Analysts were expecting $503.6 million.

Although the company's water products segment sales fell 10 percent, its water heater sales in China rose over 35 percent.

The company, which gets about 15 percent of its sales from China, is benefiting from the country's stimulus package.

The Chinese water filtration business will be a key factor in 2010, analyst Ned Borland of Next Generation Equity Research said. Shares of the Milwaukee, Wisconsin-based company were down $1.37 at $42.19 in afternoon trade on the New York Stock Exchange. They earlier touched a low of $41.31. (Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Maju Samuel)