After looking at Watsco, Inc.'s (NYSE:WSO) latest earnings update (31 December 2019), I found it helpful to revisit the company's performance in the past couple of years and compare this against the latest numbers. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is an important aspect. In this article I briefly touch on my key findings.
Did WSO perform better than its track record and industry?
WSO's trailing twelve-month earnings (from 31 December 2019) of US$226m has increased by 1.1% compared to the previous year.
However, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 10%, indicating the rate at which WSO is growing has slowed down. Why could this be happening? Well, let's look at what's occurring with margins and if the whole industry is facing the same headwind.
In terms of returns from investment, Watsco has fallen short of achieving a 20% return on equity (ROE), recording 17% instead. However, its return on assets (ROA) of 9.0% exceeds the US Trade Distributors industry of 6.7%, indicating Watsco has used its assets more efficiently. Though, its return on capital (ROC), which also accounts for Watsco’s debt level, has declined over the past 3 years from 22% to 17%.
What does this mean?
Though Watsco's past data is helpful, it is only one aspect of my investment thesis. Companies that have performed well in the past, such as Watsco gives investors conviction. However, the next step would be to assess whether the future looks as optimistic. I recommend you continue to research Watsco to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WSO’s future growth? Take a look at our free research report of analyst consensus for WSO’s outlook.
- Financial Health: Are WSO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2019. This may not be consistent with full year annual report figures.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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