Watsco's (WSO) Q2 Earnings & Revenues Lag, Margins Fall

Watsco, Inc. WSO reported second-quarter 2019 results, wherein earnings and revenues missed the Zacks Consensus Estimate. Notably, revenues missed the consensus estimate for the fifth straight quarter. Following the results, the company’s shares declined 1.4% on Jul 18.

The company’s quarterly earnings of $2.40 per share lagged the consensus estimate of $2.54 by 5.5%. Total revenues of $1,371.8 million missed the consensus mark of $1,388 million by 1.2%.

Nevertheless, its top line grew 3% year over year but bottom line was in line with the prior-year figure. On a same-store basis, sales increased 1% from the prior year. The quarter marked the company’s highest quarterly earnings and revenues in its history. Acquisition-related activities added to the positives, which were partially offset by unfavorable weather in certain markets served during June.

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. Price, Consensus and EPS Surprise

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

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

Sales Discussion of Product Lines

Sales of HVAC equipment (heating, ventilating and air conditioning; accounting for 69% of sales) grew 3% from a year ago, owing to 4% growth in residential products. However, sales of other HVAC products (28% of sales) and commercial refrigeration products (3% of sales) declined 2% and 1%, respectively, from the prior-year quarter.

Operating Highlights

Cost of sales grew 3.2% from the prior-year quarter to $1,043.9 million. Gross margin declined 20 basis points (bps) to 23.9%.

Selling, general & administrative (SG&A) expenses increased 5.3% from the year-ago quarter to $196.5 million. Excluding locations opened or acquired during the past 12 months, SG&A expenses increased 2%.

Operating income decreased 2.1% from the prior-year period to $134.4 million. Operating margin also fell 50 bps year over year to 9.8%.

Financial Operations

As of Jun 30, 2019, the company had cash and cash equivalents of $55.9 million compared with $82.9 million at 2018-end. Cash provided by operations was $68.4 million in the first six months of 2019 compared with $19.3 million net cash used for operations a year ago.

Acquisitions

During the second quarter, Watsco completed three transactions for a total consideration of $60 million. In June 2019, Watsco acquired the remaining 20% ownership of Homans Associates, a division of Carrier Enterprise Northeast LLC. Operating from 16 locations in the Northeastern United States., the latter will work as a stand-alone subsidiary of the company.

On Apr 4, 2019, the company acquired a distributor of HVAC products, namely DASCO Supply. DASCO operates in seven locations, and serves more than 2,500 customers in New Jersey, New York and Connecticut.

Again, in April 2019, it purchased an additional 1.8% ownership stake in Russell Sigler, Inc., bringing its total interest in the entity to 38.1%. Russell Sigler, which is a distributor of HVAC products, operates in 30 locations across the Western United States.

Notably, on Jul 18, 2019, the company announced that it has entered into an agreement to acquire the HVAC business of Peirce-Phelps, Inc. Currently, Peirce Phelps serves more than 9,000 contractor-customers from 19 locations in Pennsylvania, New Jersey and Delaware. Meanwhile, Peirce-Phelps will work as a subsidiary of Carrier Enterprise LLC, a joint venture between Watsco and Carrier Corporation.

Zacks Rank

Watsco — which shares space with Lennox International Inc. LII, Comfort Systems USA, Inc. FIX and AAON, Inc. AAON in the Zacks Building Products - Air Conditioner and Heating industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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