Watsco, Inc.’s WSO robust unit demand, higher equipment pricing, improved sales mix and continued investment in technology bode well. However, lower gross margin due to rising costs raises concerns.
Growth Drivers
Watsco is making continued investment in technologies to enhance customer-experience. This will not only help the company build customer confidence but also help it to ensure consistency in demand for their latest innovative products. During the first six months of 2018, the company reported a significant increase in technology spending of 9% year over year to $24 million.
In this digitalized world, the company is investing to achieve customer satisfaction through e-commerce to maintain its market share. Watsco expects e-commerce sales to reach $1.2 billion in 2018 and exit the year close to a 30% run rate.
Notably, in the second quarter, Watsco recorded the highest sales and profits in history buoyed by higher unit demand and improved sales mix for replacement systems. Improved equipment pricing added to the positives.
Additionally, the company follows investor-friendly policies. During the second quarter of 2018, the company approved a 16% hike in annual dividend to $5.80 per share. Notably, 2018 marks the 44th consecutive year of dividend payments.
Meanwhile, the company has solid a balance sheet which will aid growth. Since 2000, the company’s cash flow has been approximately $2.2 billion compared with net income of around $2 billion, surpassing its stated goal of generating cash flow in excess of net income. Consequently, the company continues to look for investments to grow network as well as invest in acquisitions or mergers.
Headwinds
In the last reported quarter, the company’s gross profit margin declined 20 basis points due to the absence of non-reoccurring benefits related to refrigerants in the quarter unlike last year. Again, the timing of vendor-related incentives added to the woes. Selling, general and administrative expenses have increased 3.1% year over year in the second quarter.
Additionally, fluctuations in sales due to seasonal demand of residential air conditioners and heating equipment hurt its profitability significantly.
The stock price has gained 23.4%, comparing unfavorably with the industry’s rise of 30.6% in a year’s time.
Zacks Rank & Stocks to Consider
Watsco carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Construction sector are Armstrong Flooring, Inc. AFI, Norbord Inc. OSB and PotlatchDeltic Corp. PCH, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Armstrong Flooring has an expected current-year earnings growth rate of 104.7%.
Norbord has witnessed a positive earnings surprise of 9.3% on average over the last four quarters.
PotlatchDeltic has an expected current-year earnings growth rate of 16.5%.
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