Watsco Inc. (WSO) shares have gained since reporting record fourth-quarter and fiscal 2013 results on Feb 13. Adjusted earnings came in at 50 cents per share, up 22% from 41 cents earned in the year-ago quarter. The earnings also beat the Zacks Consensus Estimate by a penny. The growth was aided by higher sales, stronger selling margins and continued operating cost management. Including one-time items, earnings per share in the quarter were 50 cents compared with 4 cents in the year-ago quarter.
Total revenue increased 8% year over year to $827 million and was ahead of the Zacks Consensus Estimate of $808 million. Residential air conditioning and heating (:HVAC) equipment sales rose 17% and other HVAC product sales were up 8%.
Cost and Margins
Cost of sales increased 8% year over year to $629 million. Gross profit grew 9% year over year to a record $198 million. Gross profit margin increased 10 basis points (bps) to 24% from 23.9% in the year-ago quarter. Selling, general and administrative expenses increased 6% year over year to $158 million. Income from operations rose 20% year over year to a record $40 million. Operating margin increased 50 bps to 4.8%.
Fiscal 2013 Performance
Watsco reported record earnings per share of $3.68, up 36% year over year from adjusted earnings per share of $3.03, beating the Zacks Consensus Estimate by a penny. Including one-time items, earnings per share stood at $3.68 compared with $2.70 in fiscal 2012.
Revenues increased 9% to a record $3.74 billion, beating the Zacks Consensus Estimate of $3.72 billion. Same-store sales improved 7% reflecting a 9% increase in HVAC equipment sales, and 3% sales increase in both other HVAC products and commercial refrigeration products.
Cash and cash equivalents stood at $19.5 million as of Dec 31, 2013, compared with $73.8 million as of Dec 31, 2012. Cash flow from operating activities for fiscal 2013 amounted to $150 million. The debt-to-capitalization ratio was 17% as of Dec 31, 2013, compared with 24% as of Dec 31, 2012.
Watsco has immense potential in the replacement market given an aging stock of air conditioners and heating systems in the U.S. Watsco’s joint venture with Carrier Corporation, a wholly owned subsidiary of United Technologies Corp. (UTX), continues to generate profits. The company intends to purchase an additional 10% interest in the venture in the Sun Belt region in 2014. This is likely to be accretive to earnings.
Watsco’s intends to improve revenues to above $10 billion and margins above 10% through new product offerings, geographic expansion, and logistical, productivity improvements. However, the volatility in housing starts and lack of potential acquisitions remain concerns.
Watsco currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Lennox International, Inc. (LII) and Avnet, Inc. (AVT). Both these carry a Zacks Rank #2 (Buy).
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