Watsco (WSO) Down 2.3% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Watsco (WSO). Shares have lost about 2.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Watsco due for a breakout? 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 catalysts.

Watsco Q4 Earnings & Revenues Miss Estimates

Watsco, Inc. reported fourth-quarter 2018 results, wherein earnings and revenues missed the Zacks Consensus Estimate.

Watsco reported quarterly earnings of $1.02 per share, missing the consensus estimate of $1.06 by 3.7%. Total revenues of $991.3 million also lagged the consensus mark of $1,010.9 million by 1.9%. The poor performance was mainly due to extreme weather conditions as well as certain incremental costs.

Nonetheless, earnings increased 13.3% from the year-ago level of 90 cents per share. Also, revenues rose 2.8% from the year-ago figure of $964.3 million. The upside stemmed from higher unit demand in HVAC equipment, as well as improved pricing and sales mix. Continued investment in the technologies designed to revolutionize its customer experience added to the positives. Notably, in January 2019, Watsco increased annual dividend by 10% to $6.40 per share.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 66% of sales) went up 3%, and that of other HVAC products (30% of sales) increased 4% from the prior-year quarter. However, sales from commercial refrigeration products (4% of sales) remained flat in the quarter.

Operating Highlights

Cost of sales grew 2.5% to $741.7 million from $723.4 million a year ago. Gross profit during the reported quarter improved 3.6% year over year to $249.6 million. Also, gross profit margin improved 20 basis points (bps) to 25.2%.

However, SG&A expenses rose 5.9% year over year to $191.9 million. In fact, SG&A expenses, as a percentage of sales, surged 940 bps year over year. Also, operating income declined 4.6% year over year to $58.5 million. Operating margin also contracted 50 bps year over year to 5.9%.

Although the company experienced profit growth and margin expansion in various markets, Florida-based locations and Latin American markets recorded lower operating profits during the quarter. Additionally, $4 million of incremental SG&A as well as $2 million each in health-related costs and increased technology spending added to the woes. Excluding these markets, operating profit increased 9% year over year.

Financial Operations

As of Dec 31, 2018, cash and cash equivalents were $82.9 million compared with $80.5 million at 2017-end. Cash from operations came in at $170.6 million in 2018 compared with $306.5 million a year ago.

Full-Year 2018 Highlights

Watsco’s full-year quarterly earnings of $6.49 per share surpassed the consensus mark of $6.46 by 0.5%. However, total revenues of $4.55 billion lagged the same by 0.5%.

Nonetheless, earnings increased 11.7% from the year-ago level of $5.81 cents per share. Also, revenues rose 4.7% from the year-ago figure of $4.34 billion, given HVAC equipment unit growth, price increases and a richer mix of high-efficiency systems.

Gross profit also improved 5% year over year to $1.12 billion. Also, gross profit margin rose 10 bps to 24.6%. Operating income increased 5% year over year to $372 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.81% due to these changes.

VGM Scores

Currently, Watsco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 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 broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Watsco has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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