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Watsco (WSO) Gains Amid Industry 12% Fall in a Year: Here's Why

·5 min read

Watsco, Inc. WSO shares have moved up 1.1% in a year against the Zacks Building Products - Air Conditioner and Heating industry’s almost 12% fall, the Zacks Construction sector’s 17.7% decline and S&P 500’s 11.7% decrease.

This Zacks Rank #3 (Hold) company has been gaining strength from its continuous investment in industry-leading technologies, accretive acquisitions and a consistent focus on rewarding customers. Also, its gradual transformation from manual processes to a completely digital platform is gaining traction.

However, the construction sector is grappling with intense inflation, supply chain disruption and labor woes. This apart, Watsco is investing a heavy amount in technology deployment, which is ultimately increasing costs. Also, seasonality and competitive pressure are concerns.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Defying these odds, let’s discuss the factors in detail on which Watsco has been riding high.

Four Factors Favoring the Growth Trajectory

Increased Investment in Technology: As the digital era progresses, speed, productivity and efficiency will be more critical. On that note, Watsco is investing in technologies to improve customer experience through e-commerce. It is using various new technologies to transform the homeowner experience, which will help the company expand its customer base.

Currently, it has the industry’s largest database of digitized product information, with nearly 1.2 million SKUs being used by more than 350,000 technical contractors and technicians annually via the Product Information Management (PIM) database. Also, its Contractor Assist Mobile apps provide customers with real-time access to critical information that improves their speed and productivity. The authenticated user community grew 27% during the second quarter to more than 32,000 users.

Driven by various technology platforms, e-commerce sales were up nearly 25% in the first half of 2022 from the comparable year-ago period. E-commerce sales outpaced $2.2 billion for the trailing 12 months period and account for 33% of total sales, including acquired revenues. Watsco has boosted its annualized technology spending to $48 million.

Accretive Buyouts: Acquisitions have been Watsco’s preferred mode of solidifying its product portfolio and leveraging new business opportunities in a bid to increase its customer base and profitability. The company focuses on partnering with businesses focused on the HVAC/R industry. Watsco’s revenues in HVAC/R distribution grew to $6.3 billion in 2021 from $64.1 million in 1989, mainly buoyed by the strategic acquisition of companies with established market positions.

On Aug 20, 2021, one of its wholly-owned subsidiaries acquired Makdad Industrial Supply Co., Inc. Makdad is a distributor of air conditioning and heating products operating from six locations in Pennsylvania.

Strong Liquidity, Rewarding Shareholders: Watsco has a strong balance sheet position and enough liquidity to manage the persistent crisis. The company ended second-quarter 2022 with cash and cash equivalents of $129 million versus $118.3 million at 2021-end. The company has sufficient funds to meet the short-term obligation of $88.6 million.

Watsco has been rewarding shareholders on a timely basis for 48 consecutive years via share repurchases and dividends. Watsco has been focused on sharing its cash flows with shareholders along with maintaining a strong financial position. The company has increased dividends in 20 of the last 21 years. In February 2022, the board of directors raised the annual dividend by 13% to $8.80 per share, effective April 2022.

Superior ROE: Watsco’s superior return on equity (ROE) is also indicative of its growth potential. The company’s ROE currently stands at 25.3% compared with the industry’s 15.9%. This indicates efficiency in using its shareholders’ funds and Watsco’s ability to generate profit with minimum capital usage.

Key Picks

Arcosa, Inc. ACA, currently sporting a Zacks Rank #1, is a manufacturer of infrastructure-related products and services, serving construction, energy and transportation markets.

ACA’s expected earnings growth rate for 2022 is 7.8%. The Zacks Consensus Estimate for current-year earnings has improved 13.7% over the past 30 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gibraltar Industries, Inc. ROCK, currently carrying a Zacks Rank of 2 (Buy), is benefiting from its three-pillar value creation strategy, the strong housing market and solid demand for legacy and TerraSmart businesses.

ROCK’s expected earnings growth rate for 2022 is 18.7%. The Zacks Consensus Estimate for current-year earnings has remained stable over the past 60 days.

Primoris Services Corporation PRIM, a Zacks Rank #2 company, is a specialty contractor company operating in the United States and Canada. A robust backlog of more than $4 billion and solid contract awards in the Energy/Renewables and Utilities segments imply incredible momentum in the future despite supply-chain and permitting challenges. Utility-scale solar projects continued to drive progress in the Energy/Renewables segment.

PRIM’s earnings for 2022 are expected to grow 18.4%. The Zacks Consensus Estimate for current-year earnings has improved 4% in the past 30 days.


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