A month has gone by since the last earnings report for Watsco (WSO). Shares have added about 1.4% in that time frame, outperforming 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 catalysts.
Watsco’s (WSO) Q2 Earnings & Revenues Lag, Margins Fall
Watsco, Inc. 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.
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.
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%.
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.
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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
Currently, Watsco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. Notably, 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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