Shares of Watsco Inc. (WSO) rose 4.6% as the company reported record third-quarter earnings of $1.56, an 18% increase year over year, led by share gains in the United States and Canada, a stronger sales mix of high-efficiency HVAC (heating, ventilation, and air conditioning), higher gross margins and improved operating efficiencies. The reported figure beat the Zacks Consensus Estimate by a cent.
Total revenue in the third quarter increased 5% year over year to a record $1.13 billion, but missed the Zacks Consensus Estimate of $1.14 billion. Sales of HVAC increased 7% while sale of other HVAC products remained flat with the year-ago quarter. U.S. residential HVAC equipment sales increased 8% with gains in market share, while commercial refrigeration products sales increased 14%.
Cost and Margins
Cost of sales increased 4% year over year to $860 million and gross profit grew 6% year over year to $275 million. Gross margin increased 30 basis points (bps) to 24.2% from the year-ago quarter.
Selling, general and administrative expenses (SG&A) rose 4% year over year to $169 million. However, as a percentage of sales, SG&A dropped 20 basis points to a record low of 14.9%. Income from operations increased 10% year over year to a record $105 million. Operating margin increased 50 bps to a record 9.3%.
Financial Operations
Cash and cash equivalents were at $16.7 million as of Sep 30, 2014, down compared with $19.5 million as of Dec 31, 2013. Cash flow from operating activities was $41.7 million in the first nine-month period of fiscal 2014, as against $51.2 million in the prior-year comparable period. The company’s debt-to-total-capital ratio was 24% as of Sep 30, 2014, up from 17% as of Dec 31, 2013.
Guidance
Watsco maintained its 2014 earnings per share guidance in the range of $4.20 to $4.40 per diluted share. This reflects annual growth of 14% to 20%.
Our Take
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 continues to generate profits. In addition to continued consolidation of the North American HVAC industry, Watsco continues to increase its market share through strategic acquisitions and expansion of its product offering and logistical, and productivity improvements.
Notably, the market for residential central air conditioning, heating and refrigeration equipment and related parts and supplies in the Americas is worth around $35 billion. Watsco now owns 10% of the market share and has immense potential to increase the same as no other competitor can match its geographic footprint.
Peer Performance
Watsco currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Briggs & Stratton Corp. (BGG), Alamo Group, Inc. (ALG) and AO Smith Corp. (AOS). While Briggs & Stratton sports a Zacks Rank #1 (Strong Buy), Alamo Group and AO Smith Corp. hold a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment