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Why Is Watsco (WSO) Up 2.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Watsco (WSO). Shares have added about 2.7% 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's (WSO) Q3 Earnings Miss, Revenues Beat Estimates

Watsco, reported mixed results in third-quarter 2019, wherein earnings missed the Zacks Consensus Estimate but sales beat the same. Notably, the company’s shares jumped 5.6% on Oct 18, following the earnings release.

Quarterly earnings of $2.20 per share lagged the consensus estimate of $2.25 by 2.2%. Total sales of $1,395 million surpassed the consensus mark of $1,379 million by 1.2%.

On a year-over-year basis, the top and bottom lines grew 7.6% and 4.3%, respectively, given solid revenue contributions, benefits from the recent acquisitions, along with improved operating efficiencies.

On a same-store basis, sales increased 3% from the prior year.

Watsco is optimistic to post record revenues and earnings in 2019, courtesy of solid acquisition strategy and technology enhancement.

Product Line Sales Discussion

Sales of HVAC (heating, ventilating and air conditioning) equipment — which accounted for 69% of sales — grew 4% from a year ago, owing to 6% growth in residential products. Also, sales of other HVAC products (27% of sales) and commercial refrigeration products (4%) increased 2% and 1%, respectively, from the prior-year quarter.

Operating Highlights

Cost of sales grew 8.5% from the prior-year quarter to $1.06 billion. Gross margin declined 60 basis points (bps) to 24%.

Selling, general & administrative (SG&A) expenses increased 6.2% from the year-ago quarter to $212.5 million.

Operating income increased 2.5% from the prior-year period to $125.3 million. However, operating margin fell 40 bps year over year to 9%.

Financial Operations

As of Sep 30, 2019, the company had cash and cash equivalents of $60.2 million compared with $82.9 million at 2018-end. Cash provided by operations was $197.5 million in the first nine months of 2019 compared with $70 million net cash used for operations in the comparable year-ago period.

Acquisitions

On Aug 1, 2019, Watsco acquired Peirce-Phelps, Inc. — one of the largest HVAC distributors in North America. With operations in 19 locations in Pennsylvania, New Jersey and Delaware, the company serves more than 9,000 contractor-customers.
 

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

Currently, Watsco has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.

Outlook

Watsco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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