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Growth & Income

Watsco, Inc. (WSO - Analyst Report) recently reported strong first quarter results as it was able to turn a single-digit sales increase into triple-digit EPS growth through gross margin expansion and leverage.

Management is confident that 2011 will mark a record year of performance for the company. Analysts are bullish too and expect 29% EPS growth this year and 24% growth next year.

On top of this strong growth, the company pays a dividend that yields a stellar 3.6%. Valuation is attractive too, with shares sporting a PEG ratio near 1.0.

Company Description

Watsco, Inc. distributes air conditioning and heating equipment and related parts and supplies in the United States. It is headquartered in Coconut Grove, Florida and has a market cap of $2.1 billion.

First Quarter Results

Watsco recently reported first quarter earnings per share of 21 cents, easily beating the Zacks Consensus Estimate of 18 cents. It was a 110% increase over the same quarter in 2010.

Revenues rose a modest 4.8% to $534.3 million as sales were up across each business segment. Meanwhile, the gross margin expanded 120 basis points to 25.3% of sales.

Earnings before taxes soared a whopping 99.4% as the company leveraged its fixed costs and interest expense.

Outlook

CEO Albert Nahmad stated in the Q1 press release that he expects a "record year of performance in 2011" due in part to continued acceptance of higher-efficiency HVAC systems in both residential and commercial markets.

Analysts revised their estimates higher for both 2011 and 2012 off the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

Strong earnings growth is expected over the next two years. The 2011 Zacks Consensus Estimate is $3.21, corresponding to 29% growth over 2010 EPS. The 2012 consensus estimate is currently $3.96, representing 24% growth.

Dividend

While Watsco has been growing its bottom line, it has also been aggressively raising its dividend. Since 2001, the company has increased it at an average annual rate of 36.4%.

WSO: Watsco, Inc.

It currently yields a stellar 3.6%. The company has a relatively high payout ratio at 81%, so don't expect the dividend to double every two years like it has recently.

Valuation

Shares of Watsco has pulled back considerably over the last few weeks amid the recent market weakness and has entered "oversold" territory:

WSO: Watsco, Inc.

The stock currently trades at 19.4x 2011 earnings, a slight discount to the industry average. Its PEG ratio is an attractive 1.0 based on a 5-year growth rate of 19.3%.

Conclusion

Watsco, Inc. offers investors solid earnings growth potential and a juicy dividend yield. With the recent market pullback and shares sporting a PEG ratio near 1.0, now could be a good time to get in.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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