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Watsco's (WSO) Q3 Earnings Miss, Revenues Beat Estimates

Zacks Equity Research

Watsco, Inc. WSO 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.

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. Price, Consensus and EPS Surprise

 

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

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.

Zacks Rank & Other Key Picks

Watsco currently carries a Zacks Rank #2 (Buy). Other top-ranked stocks from the Zacks Construction sector include Aegion Corporation AEGN, KB Home KBH and Meritage Homes Corporation MTH, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aegion, KB Home and Meritage Homes have an impressive long-term earnings growth rate of 10%, 9.3% and 8.5%, respectively.

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