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Watsco (WSO) Shares Fall 6.5% as Q4 Earnings Miss Estimates

Zacks Equity Research

Watsco, Inc. WSO reported fourth-quarter 2018 results, wherein earnings and revenues missed the Zacks Consensus Estimate. Subsequently, shares of the company declined 6.5% at the end of yesterday’s trading session.

Watsco reported quarterly earnings of $1.02 per share, missing the consensus estimate of $1.06 by 3.4%. 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.

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. Price, Consensus and EPS Surprise | Watsco, Inc. Quote

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.

Zacks Rank & Key Picks

Watsco currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the Zacks Construction sector include Comfort Systems USA, Inc. FIX, Altair Engineering Inc. ALTR and Gates Industrial Corporation plc GTES. While Comfort Systems sports a Zacks Rank #1 (Strong Buy), Altair Engineering and Gates Industrial both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comfort Systems’ earnings for the current quarter are expected to grow 84.4%.

Altair Engineering’s 2018 earnings are anticipated to increase 23.1%.

Gates Industrial’s earnings for the current quarter are anticipated to improve 16%.

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