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Growth & Income

Watsco, Inc. (WSO - Analyst Report) recently delivered solid first quarter results, and management provided a bullish outlook for 2012.

This prompted analysts to revise their estimates higher, sending the stock to a Zacks #1 Rank (Strong Buy) stock.

Based on consensus estimates, analysts project solid double-digit EPS growth for Watsco over the next several years. On top of this, the company pays a dividend that yields a solid 3.4%.

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 $2.3 billion.

First Quarter Results

Watsco recently reported first quarter earnings per share of 24 cents, 14% higher than the same quarter last year. It was in-line with the Zacks Consensus Estimate.

Revenues rose 19% to a record $634 million, well ahead of the consensus of $581 million. This was driven by a 12% increase in sales of air conditioning and heating (HVAC) equipment. And same-store sales were up a solid 7%.

The gross margin did contract 150 basis points, however, to 23.8% of sales. But operating income increased 19% as the operating margin held steady at 3.2%.

Outlook

In its Q1 press release, the company stated that it expects 2012 EPS between $3.25 and $3.40, representing 19-24% growth over 2011 EPS. This prompted analysts to revise their estimates higher, sending the stock to a Zacks #1 Rank (Strong Buy).

The 2012 Zacks Consensus Estimate is now $3.35, within guidance, and corresponding with 22% growth. The 2013 consensus estimate is currently $3.98, representing 19% 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 31%.

It currently yields a stellar 3.4%.

Valuation

The valuation pictures looks reasonable for Watsco with shares trading at 20x 12-month forward earnings, a slight discount to the industry median. Its PEG ratio is 1.2 based on a 5-year consensus growth rate of 16.7%.

Conclusion

Watsco offers investors solid earnings growth potential and a juicy dividend yield at a reasonable price.

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

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