The distributor of air conditioning, heating, and refrigeration equipment, Watsco, Inc. (WSO) has raised its stake in Carrier Enterprise LLC, a joint venture with Carrier Corporation, to 80% from 70% for about $90 million.
Carrier is a leader in high technology heating, air-conditioning and refrigeration solutions. It is a unit of United Technologies Corp. (UTX), a leading global provider to aerospace and building systems industries.
In Jul 2009, Watsco formed a 60:40 joint venture with Carrier to distribute Carrier, Bryant and Payne products throughout the U.S. Sunbelt, Latin America and the Caribbean. Subsequently, Watsco formed its second and third joint ventures with Carrier in 2011 and 2012, respectively, with a 60% controlling interest.
Watsco acquired further 10% ownership interest under the options to purchase up to an additional 20% interest from Carrier (10% beginning in Jul 2012 and an additional 10% in Jul 2014). On Jul 2, 2012, Watsco exercised its option to acquire an additional 10% stake, which increased its ownership interest to 70%.
These joint-ventures not only added new products to Watsco's portfolio, but also marked the company’s entry into the international markets with the addition of Latin American and Caribbean sales operations.
In addition to continued consolidation of the North American HVAC industry, Watsco continues to increase its market share through strategic acquisitions and expansion of its product offering and logistical, and productivity improvements. Management outlined its long-term plans to increase revenues to above $10 billion and margins above 10%.
Notably, the market for residential central air conditioning, heating and refrigeration equipment and related parts and supplies in the Americas is worth around $35 billion. Watsco now owns 10% of the market and has immense potential to increase its market share as no other competitor can match its geographic footprint.
Further, Watsco will continue to benefit from demand in the replacement market as old units get replaced by more energy-efficient units in the coming years. There are roughly 89 million central air conditioning and heating systems installed in the U.S. that have been in service for more than 10 years. Moreover, higher efficiency units mean higher pricing and in turn higher margins for the company.
Watsco currently has a Zacks Rank #1 (Strong Buy).
Other stocks in the same sector worth a look include Nortek Inc. (NTK) and Tutor Perini Corp. (TPC). While Nortek sports a Zacks Rank #1 (Strong Buy), Tutor Perini holds a Zacks Rank #2 (Buy).