A month has gone by since the last earnings report for Watsco (WSO). Shares have added about 4.5% 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 its most recent earnings report in order to get a better handle on the important drivers.
Watsco Q2 Earnings & Revenue Beat Estimates
Watsco, Inc. reported impressive second-quarter 2020 results, wherein earnings and revenues beat the respective Zacks Consensus Estimate. A steady recovery of sales in May and double-digit sales growth in June helped it deliver a better-than-expected performance.
Given the current market conditions, the company has been adjusting business per the needs of customers, reducing costs in affected markets and improving efficiency. It believes that financial strength, backed by highly-conservative leverage ratios, access to low-cost capital and ability to generate cash flow, allows it to take advantage of investment opportunities of almost any value.
Inside the Numbers
Watsco’s quarterly earnings of $2.26 per share topped the consensus estimate of $1.91 by 18.3%. The reported earnings, however, declined 5.8% year over year.
Total revenues of $1.36 billion surpassed the consensus mark of $1.3 billion by 4% but decreased 1.2% from the year-ago period. Sales were down 6% on a same-store basis.
Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 70% of sales) were down 4% year over year, including flat sales in U.S. residential markets. Sales of other HVAC products (27% of sales) also decreased 9% from the prior-year quarter. Sales from commercial refrigeration products (3% of sales) were down 15% year over year.
Gross margin contracted 30 basis points (bps) in the quarter. SG&A expenses improved 1% year over year. On a same-store basis, SG&A expenses — as a percentage of sales — improved 20 bps year over year as Watsco had a few store closings and loss of business across its network. Operating margin, on a same-store basis, contracted 10 bps year over year to 9.7%.
As of Jun 30, 2020, cash and cash equivalents were $79.6 million compared with $74.5 million at 2019-end. Cash from operations came in at $261.3 million in the first six months of 2020 compared with $68.4 million in the comparable year-ago period.
Over the 12 months ended Jun 30, 2020, Watsco produced $529 million of operating cash flow versus net income of $285 million, repaid $186 million in debt and increased dividends by 11% to an annual rate of $7.10 per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 28.97% due to these changes.
Currently, Watsco has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
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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