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Watsco (WSO) Q4 Earnings & Sales Lag Estimates, Margins Down

Zacks Equity Research

Watsco, Inc. WSO reported lackluster results in fourth-quarter 2019, wherein both earnings and revenues missed the Zacks Consensus Estimate. Also, its bottom line declined on a year-over-year basis due to higher SG&A.

In a bid to impress investors, Watsco announced 11% increase in annual dividend to $7.10 per share on each outstanding share of its common and Class B stock. The change will be reflected in its next quarterly dividend payment beginning in April 2020.

Inside the Numbers

Watsco reported quarterly earnings of 92 cents per share, missing the consensus estimate of $1.01 by 8.9%. Also, the said metric declined 9.8% from the year-ago level of $1.02 per share. Lower margins and continued costs associated with technology investments were partially offset by a lower tax rate in the quarter.

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. price-consensus-eps-surprise-chart | Watsco, Inc. Quote

Total revenues of $1.07 billion lagged the consensus mark of $1.08 billion by 0.9% but increased 8.2% from the year-ago period. Sales grew 1% on a same-store basis. The upside stemmed from strong HVAC equipment business, partially offset by soft demand in a few markets served. Continued investment in the technologies designed to revolutionize its customer experience added to the positives.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 67% of sales) were up 3%, and that of other HVAC products (29% of sales) increased 2% from the prior-year quarter. Also, sales from commercial refrigeration products (4% of sales) rose 4% in the quarter.

Operating Highlights

Cost of sales grew 9.5% from a year ago to $811.8 million. Gross margin contracted 90 basis points (bps) to 24.3%.

SG&A expenses increased 10% year over year due to addition of 35 locations. In fact, SG&A expenses — as a percentage of sales — surged 30 bps year over year. Operating margin contracted 100 bps year over year to 4.9%.

Financial Operations

As of Dec 31, 2019, cash and cash equivalents were $74.5 million compared with $82.9 million at 2018-end. Cash from operations came in at $335.8 million in 2019 compared with $170.6 million a year ago.

2019 Highlights

Watsco’s 2019 earnings came in at $6.50 per share, lagging the consensus mark of $6.52 by 0.3% but increasing 0.2% from 2018. Total revenues of $4.77 billion also missed analysts’ expectation by 0.2% but improved almost 5% year over year.

Gross margin contracted 30 bps to 24.3%. Operating margin declined 50 bps year over year to 7.7%.

Zacks Rank

Watsco — which shares space with AAON, Inc. AAON, Comfort Systems USA, Inc. FIX and Lennox International Inc. LII in the same industry — currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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