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Watsco (WSO) Up 1.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·3 min read

It has been about a month since the last earnings report for Watsco (WSO). Shares have added about 1.8% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Watsco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Watsco's Q3 Earnings & Revenues Beat Estimates

Watsco reported impressive third-quarter 2020 results, wherein earnings and revenues beat the respective Zacks Consensus Estimate.

Albert H. Nahmad, the company’s chairman and CEO said, “Our core U.S. residential business has remained solid and continues to see above-average growth trends. We further strengthened our balance sheet, as evidenced by our record cash flow and debt reduction.”

Inside the Numbers

Watsco’s quarterly earnings of $2.76 per share topped the consensus estimate of $2.53 by 9.1%. The reported earnings also increased 25% year over year.

Total revenues of $1.54 billion surpassed the consensus mark of $1,515 billion by 1.4% and increased 10.2% from the year-ago period. Sales were also up 8% on a same-store basis. This includes 15% in U.S. markets.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 70% of sales) were up 10% year over year, including 19% sales growth in U.S. residential markets. Sales of other HVAC products (27% of sales) also increased 2% from the prior-year quarter. Sales from commercial refrigeration products (3% of sales) were flat year over year.

Operating Highlights

Gross margin expanded 30 basis points (bps) for the quarter. SG&A expenses increased 4% year over year. On a same-store basis, SG&A expenses — as a percentage of sales — remained flat year over year, given operating efficiencies achieved throughout its network. Operating margin expanded 120 bps year over year to 10.2%.

Financial Operations

As of Sep 30, 2020, cash and cash equivalents were $92.6 million compared with $74.5 million at 2019-end. Cash from operations came in at $373 million in the first nine months of 2020 compared with $198 million in the comparable year-ago period.

Watsco has paid cash dividends for 46 consecutive years. Dividends paid through Sep 30, 2020 increased 9% to $197 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 7.29% due to these changes.

VGM Scores

At this time, Watsco has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Watsco has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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