Watsco Inc. (WSO) reported first-quarter 2011 EPS of 21 cents, more than double of 10 cents recorded in the year-ago quarter and above the Zacks Consensus Estimate of 18 cents.
Revenues increased 5% year over year to a record $534 million, though falling short of the Zacks Consensus Estimate of $549 million. Air conditioning and heating (HVAC) equipment (contributing 56% of sales) grew 3% and sales of other HVAC products (36% of sales) went up 4% while commercial refrigeration products (8% of sales) surged 20%.
Sales reflect a consistent mix of higher-efficiency air conditioning systems as homeowners continue to invest in solutions that conserve energy and lower energy bills. Demand for commercial HVAC and refrigeration products strengthened as end markets and capital spending improved further.
Performance of Watsco seems all the better considering that the first quarter of each calendar year marks the seasonal low point for the company. Sales generally pick up in the second and third quarters with the magnitude of the replacement market for air conditioning, heating and refrigeration systems.
Cost of sales increased 3% to $399.3 million in the quarter and, as a percentage of revenues, improved 120 basis points to 74.7%. Gross profit soared 10% to $135 million and gross margin expanded 120 basis points to 25.3%.
Selling, general, administrative and engineering expenses went up 4% to $118.3 million in the quarter but, as a percentage of sales, improved 20 basis points to 22.1%. Watsco’s operating income of $16.7 million in the quarter increased an impressive 88% year over year with operating margin expanding 140 basis points to 3.2%.
Financial Position
Watsco had cash and cash equivalents of $35.5 million as of March 31, 2011, down from $126.5 million as of December 31, 2010. During the quarter, Watsco used $45 million of operating cash flow primarily to build up inventory for the upcoming selling season.
Watsco’s debt-to-capitalization ratio was 3% as of March 31, 2011 compared with 1% as of December 31, 2010.
Beginning in April 2011, Watsco’s quarterly dividend rate was raised 10% to 57 cents per share. Watsco has paid dividends every quarter for over 30 years, and has paid increasing annual dividends since 2001.
Our Take
Watsco continues to increase its market share through strategic acquisitions and expansion of its product offering. The company’s joint venture with Carrier not only added new products to its sales mix, but also marked its entry into international markets with the addition of the Latin American and Caribbean sales operations as well as Northeastern U.S. Moreover, the company continues to benefit from the transition to higher-efficiency air-conditioning equipment.
However, decline in housing starts, reduction of the tax credit for homeowners for purchasing a high efficiency HVAC unit and higher costs of replacing with R410A refrigerant, remain concerns. The shares of Watsco currently retain a Zacks #3 Rank (short-term Hold recommendation).
Watsco is the largest distributor of air conditioning, heating and refrigeration equipment as well as related parts and supplies in the United States. The company operates 508 locations serving over 50,000 customers in 36 states, Puerto Rico, Latin America and the Caribbean. Watsco competes with the likes of Johnson Controls Inc. (JCI), Gensco Inc and Gustave A. Larson Company.
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