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We expect Watsco Inc. (WSO - Analyst Report) to beat expectations when it reports second-quarter 2013 results on July 18.

Why a Likely Positive Surprise?

Our proven model shows that this distributor of air conditioning, heating, and refrigeration equipment as well as related parts is likely to beat earnings because it has the two key ingredients.

Positive Zacks ESP: Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +6.38%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank #2 (Buy): Note that stocks with a Zacks Rank of #1, #2 and #3 have a significantly higher chance of beating earnings. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.  

The combination of Watsco’s Zacks Rank #2 (Buy) and +6.38% ESP makes us reasonably confident of a positive earnings beat on July 18.

What is Driving the Better Than Expected Earnings?

Demand in the replacement market for air conditioners and heating systems in the U.S due to an aging stock, successful joint venture with Carrier Corporation and recovery in the housing market are expected to lead to a positive earnings surprise for Watsco in the upcoming quarter. Grainger had delivered a positive surprise of 18.18% in the preceding quarter.

Furthermore, Watsco has consistently paid dividends for over 35 years and has increased its dividend over the last 11 consecutive years. The company has substantial flexibility to make additional investments and increase its dividends going forward.  The company also reiterated its plans to reduce debt in the near-term and evaluate increasing the dividend before 2013 end.

Other Stocks to Consider

Watsco is not the only firm looking up this earnings season. We also see likely earnings beats coming from these 3 industry peers:

Ingersoll-Rand Plc (IR - Analyst Report), Earnings ESP of +0.94% and a Zacks Rank #3 (Hold).

USG Corporation (USG - Snapshot Report), Earnings ESP of +29.41% and a Zacks Rank # 2 (Buy).

James Hardie Industries plc. , Earnings ESP of 6.67% and Zacks Rank # 3 (Hold).
  

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